Bombay Rayon Holdings Ltd. Vs ITO (ITAT Mumbai)
Another issue in this regard for A.Y.2010-11 onwards is that the loan has been converted into share application money. In this regard, the ld. Counsel of the assessee has placed reliance upon several case laws that share application money is shareholder fund and no interest should be attributable to the same. In the present case, we find that authorities below have given a clear finding that the plea that so called share application money which is said to be given for strategic purpose for acquiring control is not sustainable at all. Assessee has full control over the AE. It could not be said that giving further loans and considering it as share application advance can strengthen assessee’s control over the same. Hence, the plea that the loan was advanced as strategic shareholder function totally fails. Moreover it is not the issue of inordinate delay of conversion of share application money into share capital. The fact is that the issue of conversion into share capital was given a complete go by and subsequently the entire amount was written off as irrecoverable. Hence, the case laws relied by the assessee’s Counsel are in totally different context. Hence, this plea does not fortify the case of the assessee.
Now, we come to the issue of application on interest rate on the said sum advanced. In this regard we note that the DRP has distinguished the decision in the case of CIT vs. Tata Autocomp systems Ltd (supra) by observing that the said decision does not render any ratio. In our considered opinion, this observation of the Dispute Resolution Panel totally uncalled for. We are of the considered opinion that decision of the Jurisdictional High Court is fully binding upon all the Courts and Tribunal of subordinate jurisdiction. We note that in the said case the assessee advanced funds to its wholly owned subsidiary in Germany on interest-free terms. The TPO held that the transaction was an “international transaction” and held that the assessee ought to have received interest at 10.25% being the lending rate charged by the banks in India (Arms length price). The DRP enhanced the rate of interest to 12%. On appeal, the Tribunal followed its earlier view in WF Ltd. Vs. DCIT (ITA No.673/Mum/06) and DCIT Vs. Tech Mahindra Ltd (46 SOT 141) and held that as the amount was advanced to an AE in Germany, the ALP rate of the interest had to be determined by adopting the EURIBOR rate of interest i.e. rates prevailing in Europe. The Department challenged the said finding of the Tribunal in the High Court on the basis that the EURIBOR does not govern the monetary markets or interest rates in India, which is the residence country of assessee and EURIBOR rate is not applicable to the loans for which foreign currency has to be purchased by the Lender. HELD by the High Court dismissing the appeal:
“We find that the impugned order of the Tribunal inter alia has followed the decisions of the Bombay Bench of the Tribunal in cases of VVF Ltd. Vs. DCIT I (supra) and DCIT Vs. Tech Mahindra Ltd.”46 SOT 141 to reach the conclusion that ALP in the case of loans advanced to Associate Enterprises would be determined on the basis of rate of interest being charged in the country where the loan is received/consumed. Mr.Suresh Kumar the learned counsel for the revenue informed us that the Revenue has not preferred any appeal against the decision of the Tribunal in ‘ VVF Ltd. Vs. DCIT'(supra) and DCIT Vs. Tech Mahindra Ltd. “(supra) on the above issue. No record has been shown to us as to why the Revenue seeks to take a different view in respect of the impugned order from that taken in VVF Ltd. Vs. DCIT (supra) and ” DCIT Vs. Tech Mahindra Ltd. “(supra). The Revenue not : having filed any appeal, has in fact accepted the decision of the Tribunal in “VVF Ltd. Vs. DCIT (supra) and ” DCIT Vs. Tech Mahindra Ltd.“(supra). In view of the above we see no reason to entertain the present appeal as in similar matters the Revenue has accepted the view of the Tribunal which has been relied upon by the impugned order”.
We followed the above said case law and accordingly, hold that the arm‟s length price computed by adopting the lending rate of banks in India is not sustainable. In this regard, we agree with the alternative submission of the assessee that the interest should be charged at LIBOR+200 bps. Such charging of interest has been approved by Hon’ble Jurisdictional High Court in several other case laws. We direct accordingly. It may not be out of place to mention that revenue’s insistence on application of bank rates in India will throw open the issue of assessee not incurring any expenditure on the funds for advancing the loan. As we have already held this issue is not to be considered for the computation of arm’s length price for an international transaction here.
FULL TEXT OF THE ITAT JUDGEMENT
These are appeals by the assessee against respective orders of the assessing officer passed under section 143(3) / 147 r.w.s. 144C(1) of the Income Tax Act, 1961 pursuant to directions of the Dispute Resolution Panel. Since the issues are common and connected and the appeals were heard together these are being consolidated and disposed of together for the sake of convenience
2. The common grounds of appeal read as under:-
For the sake of reference we are referring to the grounds of A.Y.2009-10.
General
1. On the facts and circumstances of the case and in law, the learned Transfer Pricing Officer (‘TPO’) / learned Assessing Officer (‘AO’) / Hon’ble Dispute Resolution Panel (‘DRP’) erred in making transfer pricing adjustment of INR 13,38,53,244 on account of interest on transaction of loan advanced by the appellant to its associated enterprise (‘AE’) in Italy, alleging the same to be not at arm’s length in terms of the provisions of section 92C(1) and 92C(2) of the Income Tax Act 1961 (‘the Act’), read with Rule 10D of the Income Tax Rules, 1962 (‘the Rules’).
Re-opening of assessment
2. On the facts and circumstances of the case and in law, the learned AO erred in issuing notice u/s 148 of the Act for re-opening the assessment without properly appreciating the facts of the case and in law.
3. On the facts and circumstances of the case and in law, the learned AO erred in re-opening the assessment on the basis of information received from DCIT, Central Circle – 6(3), Mumbai regarding survey action carried out u/s 133 A of the Act on M/s Bombay Rayon Fashions Ltd; the holding company of the appellant, during which statement of Shri Prashant Agarwal in the capacity of Managing Director of M/s Bombay Rayon Fashions Ltd. was recorded on oath u/s 131 of the Act
4. On the facts and circumstances of the case and in law, the learned AO further erred in not appreciating the decision of the Hon’ble Supreme Court in the case of CIT vs Kadar Khan Sons as reported in 352 ITR 480 which held that the learned AO has no power u/s 133 of the Act to administer oath and take a sworn statement.
Violation of Section 144CC13) of the Act
5. On the facts and circumstances of the case and in law, the learned AO/TPO erred in passing the final assessment order not in conformity with the directions of the Hon’ble DRP thus violating the mandatory provisions of section 144C(13) of the Act.
Loan transaction
Interest should not be charged on the loan transaction.
6. On the facts and circumstances of the case and in law, the learned TPO/ learned AO /Hon’ble DRP erred in disregarding the fact that the appellant had received interest free loan from its holding company i.e. Bombay Rayon Fashion Ltd. and advanced the said loan to BRFL Italia SRL, its AE in Italy, interest free for promoting the ‘GURU’ brand.
7. On the facts and circumstances of the case and in law, the learned TPO/ learned AO /Hon’ble DRP erred in disregarding the fact that the loan was advanced by the appellant to its AE for promoting the ‘GURU’ brand in Italy and hence disregarded the purpose of the loan advanced by the appellant to its AE and thus determined adjustment without considering the surrounding circumstances / commercial expediency of the loan advanced by the appellant to its AE.
8. On the facts and circumstances of the case and in law, the learned TPO/ learned AO /Hon’ble DRP erred in not appreciating that the law requires the arm’s length price to be determined keeping in mind the term ‘having regard to’ as used in section 92(1) of the Act. The learned TPO/ learned AO /Hon’ble DRP further erred in not appreciating that the income arising from an international transaction is required to be computed in relation to all relevant factors including those relevant to determine arm’s length price.
Without prejudice if interest is to be charged on the loan transaction, SBI PLR + 300bps cannot be applied.
9. On the facts and in the circumstances of the case and in law, the learned TPO/ learned AO erred in not issuing a show cause notice to the appellant for charging interest at SBI PLR + 300 basis points thus denying the opportunity to the appellant for making its submissions against the interest rate and thus violating principles of natural justice. The Hon’ble DRP further erred in upholding the action of the learned AO / learned TPO.
10. On the facts and in the circumstances of the case and in law, the learned TPO/ learned AO /Hon’ble DRP erred in concluding that the loan was advanced by the appellant to its AE in Indian currency i.e. INR. and hence erred in applying SBI PLR + 300 basis points as rate of interest.
11. On the facts and in the circumstances of the case and in law, the learned TPO/ learned AO /Hon’ble DRP erred in disregarding the fact that the appellant advanced loan to its AE in Euro and interest on loan has to be computed according to the currency of the country in which the loan is utilised.
12. On the facts and in the circumstances of the case and in law, learned TPO/ learned AO / Hon’ble DRP erred in following the rates prescribed under the Safe Harbor Rules which are not applicable to the appellant since the appellant is not an ‘eligible assessee’ within the meaning of Rule 10TB of the Rules.
13. On the facts and in the circumstances of the case and in law, the learned TPO/ learned AO /Hon’ble DRP erred in concluding the credit rating of the AE i.e. the borrower as ‘below investment grade’ thus applying a higher spread rate of 300bps.
Without prejudice if interest is to be charged the rate of interest is to be restricted to LIBOR / LIBOR + 200 bps.
14. On the facts and in the circumstances of the case and in law, the learned TPO/ learned AO / Hon’ble DRP erred in not restricting the rate of interest on the loan transaction to LIBOR rates without any spread.
15. Without prejudice, learned TPO/ learned AO / Hon’ble DRP erred in applying spread on LIBOR rates. The learned TPO/ learned AO / Hon’ble DRP further erred in not restricting the spread to 200 bps.
16. On the facts and in the circumstances of the case and in law, the learned TPO/ learned AO erred in not issuing a show cause notice to the appellant for applying swap calculator for calculating spread rate thus denying the opportunity to the appellant for making its submissions against the swap calculator and violating principles of natural justice. The Hon’ble DRP further erred in upholding the action of the learned AO / learned TPO.
17. On the facts and in the circumstances of the case and in law, the learned TPO/ learned AO erred in not providing / explaining the basis for the swap calculator and the basis of search criteria adopted for computing spread.
18. On the facts and in the circumstances of the case and in law, the Hon’ble DRP erred in not adjudicating the objections with respect to swap calculator.
Data provided by the learned TPO for benchmarking the loan transaction using alternate is not reliable
19. On the facts and in the circumstances of the case and in law, the learned TPO/ learned AO erred in arbitrarily selecting companies as comparables without considering the characteristics of the loan advanced by the appellant to its AE vis-a-vis the characteristics of the comparable loan transactions. The Hon’ble DRP erred in upholding the action of the learned TPO / learned AO.
20. On the facts and in the circumstances of the case and in law, the learned TPO/ learned AO /Hon’ble DRP erred in disregarding the fact that the learned TPO has not provided the information as to whether the data of comparable companies used is of controlled transaction or uncontrolled transaction thereby violating rule 10B(2) of the Rules.
21. On the facts and in the circumstances of the case and in law, the learned TPO/ learned AO / Hon’ble DRP erred in not undertaking a detailed comparability analysis of the comparable companies identified to compute the spread.
Interest u/s 234B
22. On the facts and circumstance of the case and in law, the learned AO erred in computing interest under section 234B of the Act.
Interest u/s 234C
23. On the facts and circumstance of the case and in law, the learned AO erred in computing interest under section 234C of the Act.
Penalty u/s 271(l)(c)
24. On the facts and circumstance of the case and in law, the learned AO erred in initiating penalty u/s 27I(I)(c) of the Act.
Penalty u/s 271BA
25. On the facts and circumstance of the case and in law, the learned AO erred in initiating penalty u/s 271BA of the Act.
Penalty u/s 271FA
26. On the facts and circumstance of the case and in law, the learned AO erred in initiating penalty u/s 271FA of the Act.
The Appellant prays that the additions made by the learned AO / TPO and upheld by the Hon’ble DRP be deleted and consequential relief be granted.
The Appellant craves leave to add, alter, amend and/or withdraw any of the above grounds of appeal and to submit such statements, documents and papers as may be considered necessary either at or before the hearing of this appeal as per law.,
2.1. Further Grounds relating to A.Y.2010-11 to 2014-15 only are as under:-
“On the facts and circumstance of the case and in law, the Hon’ble DRP erred in considering share application transaction and loan transaction as one single transaction without appreciating that the learned TPO himself has considered both the transactions as two different transaction in the transfer pricing order.
On the facts and circumstance of the case and in law, the Hon’ble DRP erred in directing the learned AO / learned TPO to apply SBI PLR + 300 basis points interest rate on share application transaction only on the ground that one consistent rate should be applied to entire transaction. However, not appreciating that they are two separate transactions.
On facts and circumstances of the case and in law, the learned TPO/learned AO/ Hon’ble DRP erred in proposing adjustment on conversion of loan to share application money since there is no income arising from the international transaction of share application, being an investment/ shareholder activity.
Without prejudice, on facts and circumstances of the case and in law, the learned TPO/learned AO/ Hon’ble DRP erred in proposing adjustment on conversion of loan to share application money since there is no income arising from the international transaction of share application, being an investment/ shareholder activity.
Without prejudice, on the fact and circumstances of the case and in law, the learned TPO / learned AO erred by not bringing on record a comparable transaction of interest being charged on share application money pending allotment among unrelated parties. The Hon’ble DRP erred in upholding the action of the learned TPO / learned AO.
Without prejudice, on the fact and circumstances of the case and in law, the learned TPO / learned AO erred in applying LIBOR rate on share application transaction. The learned AO / learned TPO further erred in applying spread in addition to LIBOR rate on share application transaction.”
2.2. Assessee has also filed additional ground of appeal for all the years which reads as under:-
“1. On the facts and circumstances of the case and in law, the learned AO / TPO have erred in determining the arm’s length price of the international transaction of interest free loans on an adhoc basis and not in accordance with section 92C of the Income Tax Act, 1961 read with Rule 10B of the Income Tax Rules, 1962. The Hon’ble DRP has further erred in upholding the action of the learned AO/TPO.”
2.3. Assessee prays that it is a legal ground and hence it should be admitted.
2.4. Some facts are similar. We are referring to the facts and findings from A.Y.2009-10.
3. Brief facts of the case are that the assessee is a wholly owned subsidiary of Bombay Rayon Fashions Ltd (BRFL) which is a widely held public limited company. The assessee has two 100% subsidiaries namely BRFL Europe, B.V. and BRFL Italia SRL. The BRFL Italia SRL (‘BRFL Italy’ herein referred to as ‘AE’) was formed by the Group ostensibly to have a presence in the European region; to take over the other retail businesses of M/s Jam Session Holding SRL which owned a brand name ‘GURU1, (initially BRFL Italia SRL was incorporated as a 100% subsidiary of BRFL Europe BV on 05/08/2008 but w.e.f. 29/01/2009 the entire holding of BRFL Italia SRL was transferred to the assessee company). The assessee had filed its return of income for AY 200910 on 21/09/2009 declaring ‘nil’ income. The same had been accepted u/s 143(1) of the Act. A survey action under section 133(1) of the Act took place on the premises of the assessee on 16/12/2014 and it was found that the assessee had advanced loans to its AE. During the financial years 2008-09 to 2013-14 and that no interest has been charged on the loans so provided. It was also noted that the loans had been advanced out of the interest-bearing funds received from the holding company M/s Bombay Rayon Fashions Ltd. Subsequently in his statement recorded under section 131 of the Act, Shri Prashant Agarwal, the Managing Director of M/s Bombay Rayon Fashions Ltd, agreed that the assessee should have charged interest on the loans advanced to the AE @L1BOR +2% and on the basis of the prevailing rates the interest computed was also offered for taxation by him in the hands of the assessee for the respective financial years. Accordingly, the reassessment proceedings for AY 2009-10 was initiated by the AO and the notice under section 148 of the Act issued on 29/03/2016 but in the return of income filed by the assessee no disclosures were made and again a nil return was filed.
4. In this case, after obtaining the approval of the jurisdictional Pr. Commissioner, the AO referred the matter of the International Transactions to the TPO in order to determine the arm’s length price for all the financial year’s concerned. The TPO also took up all the cases from AY 2009-10 to 2014-15 together and called for the necessary details. The assessee filed an Accountant’s Report in Form No. 3CEB before the TPO during the course of the proceedings, as under:
