Nagarjuna Fertilizers and Chemicals Limited, Hyderabad, Hyderabad V. ACIT, Cirlce-16(1), Hyderabad, Hyderabad

ITA 93/HYD/2017

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 6491 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 6 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-07-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 26-06-2018
• Assessment Year: 2012-2013
• Appeal Filed On: 19-01-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: J SIRI KUMAR
• Assessee Lawyers: C S SUBRAMANYAM
• Keywords: Transfer pricing; International transaction
• Section: 143(3); 115JB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SMT P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NOS. 93 & 2031/HYD/2017 ASSESSMENT YEARS: 2012-13 & 2013-14 NAGARJUNA FERTILIZERS AND CHEMICALS LTD., HYDERABAD PAN AADCK 1533 E VS. ASST. COMMISSIONER OF INCOME-TAX, CIRCLE 16(1), HYDERABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI C.S. SUBRAMANYAM REVENUE BY : SHRI J. SIRIKUMAR DATE OF HEARING 26/06/2018 DATE OF PRONOUNCEMENT /07/2018 O R D E R PER S. RIFAUR RAHMAN, A.M.: THESE TWO APPEALS ARE PREFERRED BY THE ASSESSEE AGA INST THE ORDERS PASSED U/S 143(3) R.W.S. 92CA(3) AND144C(13) OF THE INCOME TAX ACT, 1961 (IN SHORT ACT) RELATING TO AY 2012 -13 AND 2013-14. AS SIMILAR ISSUES INVOLVED IN BOTH THESE APPEALS, THE SAME WERE CLUBBED AND HEARD TOGETHER AND, THEREFORE, A COMMON ORDER I S PASSED FOR THE SAKE OF CONVENIENCE, 2. BRIEFLY THE FACTS OF THE CASE, AS TAKEN FROM AY 2012-13 ARE, ASSESSEE COMPANY, ENGAGED IN THE BUSINESS OF MANUFA CTURING AND SALE OF UREA & MICRO IRRIGATION SYSTEMS, TRADING O F FERTILIZERS & PESTICIDES AND ALSO PROVIDING AGRI SERVICERS WIND E NERGY GENERATION, FILED ITS RETURN OF INCOME FOR THE AY 2012-13 ON 20 /09/2012 ADMITTING TOTAL INCOME OF RS. 224,82,67,271/- AND BOOK PROFIT U/S 115JB AT RS. 135,95,52,310/-. THE RETURN WAS PROCESSED U/S 143(1 ) AND 2 ITA NOS. 93 & 2031/HYD/17 NAGARJUNA FERTILIZERS AND CHEMICALS LTD., HYD. SUBSEQUENTLY THE CASE WAS SELECTED FOR SCRUTINY. AC CORDINGLY, STATUTORY NOTICES WERE ISSUED AND THE ASSESSEE FILE D THE INFORMATION AS CALLED FOR. 2.1 AS THE ASSESSEE ENTERED INTO INTERNATIONAL TRAN SACTIONS, THE AO REFERRED THE CASE TO TRANSFER PRICING OFFICER AFTER OBTAINING PRIOR APPROVAL FROM THE CIT 4, HYDERABAD. THE TPO DECI DED AS UNDER: 3. PROFILE OF THE ASSESSEE: ASSESSEE IS INTO THE BUSINESS OF MANUFACTURE OF F ERTILIZERS AND CHEMICALS FOR THE AGRICULTURAL INDUSTRY. THE ASSESS EE IS LEADING MANUFACTURER AND SUPPLIER OF PLANT NUTRIENTS IN IND IA. 3.1 INTERNATIONAL TRANSACTIONS: AS PER 3CEB REPORT/TP DOCUMENT, THE INTERNATIONAL TRANSACTIONS AND THE ECONOMIC ANALYSIS ARE AS UNDER: NATURE OF INTERNATIONAL TRANSACTION AMOUNT (RS. INTEREST FREE LOAN PROVIDED 166,856,750 3.2 THE ASSESSEE HAS NOT REPORTED THE FOLLOWING TRA NSACTIONS EITHER IN TP DOCUMENT OR IN FORM 3CEB NATURE OF TRANSACTION AMOUNT (RS. INVESTMENT IN SHARES 923,907,000 3.3 THE TPO OBSERVED THAT THE ASSESSEE HAD CARRIED OUT ECONOMIC ANALYSIS AT PAGES 26 TO 36 OF THE TP DOCUMENT. WITH REGARD TO THE TRANSACTION OF INTEREST FREE LOAN PROVIDED, THE ASS ESSEE STATED THAT IT IS AN INTEREST FREE LOAN AND, HENCE, THE ASSESSEE H OLDS THE TRANSACTION TO BE AT ARMS LENGTH. 3.4 INTEREST FREE LOAN PROVIDED: THE TPO OBSERVED THAT DURING THE YEAR, THE ASSESSE E PROVIDED INTEREST FREE LOAN TO THE TUNE OF RS. 166,856,750/- , VIDE SHOW CAUSE LETTER DATED 30/09/2015, THE TPO PROPOSED TO CHARGE INTEREST @ 3 ITA NOS. 93 & 2031/HYD/17 NAGARJUNA FERTILIZERS AND CHEMICALS LTD., HYD. 14.75% P.A. ON THE SAID LOAN. THE ASSESSEE, IN ITS REPLY DATED 17/11/2015, STATED THAT SINCE, IT IS AN INTEREST FR EE LOAN, NO INTEREST SHALL BE CHARGED BUT IF IT IS TO CHARGE ANY INTERES T, THE RATE OF INTEREST CHARGED ON LOAN SHOULD BE LIBOR PLUS BY TAKING THE FOLLOWING CASES: 1. GEODESIC LTD. (2015) 2. PMP AUTO COMPONENTS (P) LTD., (2014) 3. HINDUJA GLOBAL SOLUTIONS LTD. )2013) 4. MANUGRAPH INDIA LTD. (2015) 3.5 AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESS EE, THE TPO OBSERVED AS UNDER: IT IS IMMATERIAL WHETHER THE SOURCE OF THE LOAN IS INTEREST FREE OR INTEREST BEARING. UNDER ARM'S LENGTH SITUATION H OW MUCH INTEREST COULD BE EARNED IS TO BE SEEN. RBI DOES NO T REGULATE THE INTEREST RATE CHARGEABLE ON THE OUTBOUND LOANS, BUT LOANS RECEIVED FROM THE NON-RESIDENT DIRECT INVESTOR AS W ELL AS LOAN EXTENDED TO THE SUBSIDIARIES/ASSOCIATES ABROAD HAS TO BE REPORTED IN A PRESCRIBED FORM. THE ADVANCE FROM IND IA AND' INDIAN CURRENCY HAS BEEN SUBSEQUENTLY CONVERTED INT O THE CURRENCY OF THE GEOGRAPHIC LOCATION OF THE AE, THE PLR OF THE INDIAN BANKS OUGHT TO BE APPLIED AS THE EXTERNAL CU P. THUS THE OUTBOUND LOANS ARE EFFECTIVELY RUPEE LOANS. IN CASE OF A RUPEE SOURCED LENDING TRANSACTION, THE LENDER IN ORDER TO MAXIMIZE ITS PROFITS WOULD TRY TO BENCHMARK ITS RETURNS WITH THE DOMESTIC INTEREST RATE RATHER THAN LIBOR. THE IDEAL INTEREST RATE ON OUTBOUND INTRA-GROUP LOANS WOULD BE THAT INTEREST R ATE WHICH WOULD HAVE BEEN CHARGED BY INDEPENDENT PARTIES DEAL ING IN SIMILAR CIRCUMSTANCES AND DURING THE SAME PERIOD OF TIME. RBI DOES NOT PERMIT INDIAN ENTITIES TO LEND LOANS TO AN Y ENTITY OTHER THAN THEIR WHOLLY OWNED SUBSIDIARIES AND THEREFORE THERE IS NO UNCONTROLLED TRANSACTION AVAILABLE. FURTHER THE INT EREST RATE EXPECTED BY THE LENDER IS EQUIVALENT TO THE OPPORTU NITY COST OF SUCH FUNDS. AS A HYPOTHETICAL CUP WOULD BE, WHERE T HE INDIAN ENTITY INVESTS IN BANK DEPOSITS, STOCKS, MUTUAL FUN DS OR REAL ESTATE, THE CORRESPONDING RETURN WOULD STILL BE THE EFFECTIVE INDIAN INTEREST RATE. IN VIEW OF THE ABOVE OBSERVATIONS, THE TPO CHARGED INTEREST ON THE LOAN @ 14.75, WHICH COMES TO RS. 2,46,11,370/- ON R S. 16,68,56,750/-. THEREFORE, TPO DETERMINED THE ARMS LENGTH PRICE OF INTEREST ON LOAN AT RS. 2,46,11,370/-. LATER, THE T PO VIDE RECTIFICATION 4 ITA NOS. 93 & 2031/HYD/17 NAGARJUNA FERTILIZERS AND CHEMICALS LTD., HYD. ORDER U/S 92CA(5) R.W.S. 154 DATED 24/02/2016, REVI SED THE ADJUSTMENT U/S 92CA(3) TO RS. 1,20,49,257/-. 4. AGGRIEVED BY THE ORDER OF TPO, THE ASSESSEE RAIS ED OBJECTIONS BEFORE THE DRP AND DRP DIRECTED THE TPO TO APPLY TH E INTEREST RATE @ 12.13% AS AGAINST THE SBI PLR @ 14.75% APPLIED BY THE TPO. ACCORDINGLY, THE ARMS LENGTH PRICE OF INTEREST ON LOAN WAS WORKED OUT TO RS. 99,08,981/- U/S 92CA OF THE ACT, AS AGAINST RS. 1,20,49,257/- BY THE TPO. 5. AGGRIEVED BY THE ORDER OF DRP, THE ASSESSEE IS I N APPEAL BEFORE US RAISING THE FOLLOWING GROUNDS, WHICH ARE COMMON IN BOTH THE APPEALS UNDER CONSIDERATION: GENERAL 1. THE ORDER OF THE LEARNED AO IS ERRONEOUS IN LAW AND ON THE FACTS OF THE CASE. TRANSFER PRICING ADJUSTMENT U/S 92CA(3) 2. THE LEARNED ASSESSING OFFICER (AO) / TRANSFER PR ICING OFFICER (TPO) / DISPUTE RESOLUTION PANEL ( DRP ) ERRED IN M AKING A TRANSFER PRICING ADJUSTMENT OF RS.99,08,981 TOWARDS THE INTEREST ARRIVED @ 12.13% PER ANNUM OF LOAN ADVANCED TO ASSO CIATED ENTERPRISE. 3. THE LEARNED ASSESSING OFFICER (AO) I TRANSFER PR ICING OFFICER (TPO)/ DISPUTE RESOLUTION PANEL (DRP) OUGHT TO HAVE CONSIDERED THAT ASSESSEE IS JUSTIFIED IN NOT CHARGI NG INTEREST ON LOAN GIVEN TO ASSOCIATED ENTERPRISE DUE TO COMMERCI AL CONSIDERATIONS. 4. THE LEARNED ASSESSING OFFICER ( AO ) / TRANSFER PRICING OFFICER ( TPO ) / DISPUTE RESOLUTION PANEL ( DRP ) OUGHT TO HAVE CONSIDERED THAT FOR FOREIGN LOAN TRANSACTIONS, TRANSFER PRICING ADJUSTMENT NEEDS TO BE MADE BASING ON LIBOR AS PER JUDICIAL PRECEDENTS. 5 ITA NOS. 93 & 2031/HYD/17 NAGARJUNA FERTILIZERS AND CHEMICALS LTD., HYD. 5.1 ASSESSEE HAS PRESSED GROUND NO. 4 ONLY AND ALL OTHER GROUNDS ARE NOT PRESSED FOR ADJUDICATION, ACCORDINGLY, THE SAME ARE DISMISSED. 6. WITH REGARD TO GROUND NO. 4, THE LD. AR OF THE A SSESSEE SUBMITTED THAT THE DRP SHOULD HAVE CONSIDERED THAT FOR FOREIGN LOAN TRANSACTIONS, TRANSFER PRICING ADJUSTMENT NEEDS TO BE MADE BASING ON LIBOR AS PER JUDICIAL PRECEDENTS. FOR THIS PROPOSIT ION, HE RELIED ON THE FOLLOWING CASES: 1. CIT VS. COTTON NATURALS (I) (P.) LTD., [2015] 55 TAXMANN.COM 523 (DELHI)/ 276 CTR 445 (DEL.) 2. RAIN COMMODITIES LTD., VS. ADDL. CIT, [2016] 65 TAXMANN.COM 240 (HYD. TRIB.) 3. CIT VS. VAIBHAV GEMS LTD., [2017] 88 TAXMANN.COM 12 (RAJ.) 7. ON THE OTHER HAND, LD. DR RELIED ON THE ORDER OF DRP. 8. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. ON THE SIMILAR SET OF FACTS, THE COORDINAT E BENCH OF THIS TRIBUNAL IN THE CASE OF RAIN COMMODITIES LTD., (WHE REIN THE BOTH THE MEMBERS ARE PARTY), HELD AS UNDER: 10. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND PERUSED THE MATERIAL FACTS ON RECORD AS WELL AS THE ORDERS OF THE REVENUE AUTHORITIES. THE ASSESSEE FACILITATE D THE ACQUISITION OF CII CARBON LLC BY RCUSA BY LENDING L OAN TO ITS WHOLLY OWNED ENTERPRISES. THE ASSESSEE HAS TAKEN TH E DECISION TO MAKE INVESTMENT IN ITS AE EITHER ON SHARE CAPITA L OR LENDING LOAN USING ITS BUSINESS EXPEDIENCY. SINCE, IT HAD M ADE THE DECISION TO MAKE LOAN TO ITS AE. BY VIRTUE OF AMEND MENT TO SECTION 92B, IT IS INTERNATIONAL TRANSACTION. ONCE IT IS CONSIDERED AS INTERNATIONAL TRANSACTION, IT IS PRUDENT TO MAKE BENCH MARKING ALSO IN THE INTERNATIONAL ARENA. SIMILAR VI EWS WERE EXPRESSED BY THE COORDINATE BENCH OF THIS TRIBUNAL IN THE CASES OF FOUR SOFT PVT. LTD. (SUPRA), SIVA INDUSTRIES & H OLDINGS LTD. (SUPRA) AND VIJAY ELECRICALS LTD., (ITA NO. 1159/HY D/2013. IT WAS HELD IN THE CASE OF SIVA INDUSTRIES AS BELOW: 6 ITA NOS. 93 & 2031/HYD/17 NAGARJUNA FERTILIZERS AND CHEMICALS LTD., HYD. ONCE THE TRANSACTION BETWEEN THE ASSESSEE AND THE A E IS IN FOREIGN CURRENCY AND THE TRANSACTION IS AN INTERNAT IONAL TRANSACTION, THEN, THE TRANSACTION WOULD HAVE TO BE LOOKED UPON BY APPLYING THE COMMERCIAL PRINCIPLES IN REGARD TO INTERNATIONAL TR ANSACTION. IF THIS IS SO, THEN THE DOMESTIC PRIME LENDING RATE WOULD HAV E NO APPLICABILITY AND INTERNATIONAL RATE FIXED BEING LI BOR WOULD COME INTO PLAY. IN THE CIRCUMSTANCES, WE ARE OF THE VIEW THAT IT IS LIBOR RATE WHICH HAS TO BE CONSIDERED WHILE DETERMINING T HE ARMS LENGTH INTEREST RATE IN RESPECT OF THE TRANSACTION BETWEE N THE ASSESSEE AND THE AES. CONSIDERING THE ABOVE VIEW, WE ARE INCLINED TO ACCE PT THE DECISION OF THE CIT(A) AND ACCORDINGLY WE DISMISS T HE GROUNDS OF ASSESSEE AS WELL AS GROUND 2 OF THE REVENUE. 8.1 THE HONBLE RAJASTHAN HIGH COURT IN THE CASE OF VAIBHAV GEMS LTD., (SUPRA) RELYING ON THE DECISION OF THE HONBL E DELHI HIGH COURT IN THE CASE OF CIT VS. COTTON NATURALS (I) (P.) LTD., [2015] 231 TAXMAN 401, HELD THAT WHERE INTEREST FREE LOANS ADVANCED T O OWN FOREIGN SUBSIDIARIES AND LIBOR RATE PLUS 2 PERCENT WAS ADJU STED, IT WAS TO BE HELD THAT ASSESSEE WOULD BE ENTITLED FOR BENEFIT OF AVERAGE LIBOR RATE EXISTING AT THAT TIME. 8.2 THE HONBLE DELHI HIGH COURT IN THE CASE OF COT TON NATURALS (I) (P) LTD., HELD AS UNDER: WE NOTED THAT CUP METHOD IS THE MOST APPROPRIATE IN ORDER TO ASCERTAIN ARMS LENGTH PRICE OF THE INTERNATIONAL TR ANSACTION AS THAT OF THE ASSESSEE. WE AGREE WITH THE ASSESSEES CONTENTION THAT WHERE THE TRANSACTION WAS OF LENDING MONEY IN FOREIGN CURRENCY TO ITS FOREIGN SUBSIDIARIES THE COMPARABLE TRANSACTIONS, THEREFORE, WAS OF FOREIGN CURRENCY TENDED BY UNRELA TED PARTIES. THE FINANCIAL POSITION AND CREDIT RATING OF THE SUB SIDIARIES WILL BE BROADLY THE SAME AS THE HOLDING COMPANY. IN SUCH A SITUATION, DOMESTIC PRIME LENDING RATE WOULD HAVE N O APPLICABILITY AND THE INTERNATIONAL RATE MIXED BEIN G LIBOR SHOULD BE TAKEN AS THE BENCH MARK RATE FOR INTERNAT IONAL TRANSACTIONS. 8.3 IN VIEW OF THE RATIOS LAID DOWN AS ABOVE, WE AR E OF THE VIEW THAT IT IS LIBOR RATE WHICH HAS TO BE CONSIDERED WHILE D ETERMINING THE ARMS LENGTH INTEREST RATE IN RESPECT OF THE TRANSA CTION BETWEEN THE ASSESSEE AND THE AES. WE, THEREFORE, DIRECT THE AO /TPO TO COMPUTE 7 ITA NOS. 93 & 2031/HYD/17 NAGARJUNA FERTILIZERS AND CHEMICALS LTD., HYD. THE ARMS LENGTH PRICE OF INTEREST ON LOAN. ACCORDI NGLY, GROUND NO. 4 IS ALLOWED. 9. AS THE FACTS AND GROUNDS IN AY 2013-14 ARE MATER IALLY IDENTICAL TO AY 2012-13, FOLLOWING THE CONCLUSIONS DRAWN THER EIN, WE ALLOW GROUND NO. 4 AND DISMISS OTHER GROUNDS AS THE SAME ARE NOT PRESSED BY THE ASSESSEE. 10. IN THE RESULT, BOTH THE APPEALS OF THE ASSESSEE ARE PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON 20 TH JULY, 2018. SD/- SD/- (P. MADHAVI DEVI) (S. RIFAUR RA HMAN) JUDICIAL MEMBER A CCOUNTANT MEMBER HYDERABAD, DATED: 20 TH JULY, 2018 KV COPY TO:- 1) NAGARJUNA FERTILIZERS & CHEMICALS LTD., 8-2-248, PLOT NO. 56, NAGARJUNA HILLS, PUNJAGUTTA, HYDERABAD 500 082 2) ACIT, CIRCLE 16(1) HYDERABAD. 3) DRP - 1, , BENGALURU 4) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD. 5) GUARD FILE