Section 69 addition cannot be made solely on the basis of phraseology of submissions

DCIT Vs M/s. Rabo India Finance Ltd. (ITAT Mumbai)

In the present case, the reason for invoking provisions of section 69 of the Act germinates from the contents of letters dated 27/07/2011 and 06/09/2011 written by one of the employee indicating that the assessee has extended loan of GBP 37.50 million as per part of syndicate and the participation/commitment fee of GBP 1,50,000 has been received by the assessee. Apart from the said letters, there is no other material on record to corroborate that the assessee in any manner participated in extending loan facility to Tata Tea UK as part of consortium/syndicate. In the first place the Assessing Officer has failed to take note of the fact that the contents of letter on the basis of which addition u/s.69 of the Act was made, were retracted by way of affidavit. Further, the addition cannot be made solely on the basis of phraseology of the submissions made during proceedings. There has to be substantive evidence on record to corroborate with the statements.

The findings of the TPO and the Assessing Officer in draft assessment order that the assessee has advanced loans from undisclosed sources is merely based on surmises and conjunctures. It is a well settled legal proposition that suspicion, howsoever strong, cannot take place of evidence. Except from the letters referred above there is no material to back the observations made by the TPO/AO. On the contrary, the assessee has furnished various documents to substantiate that the assessee was not part of syndicate that has extended loan facility to Tata Tea UK, however, the same have been ignored by the TPO and the assessing officer while passing the draft assessment order. In the absence of any cogent evidence, the Revenue has failed to discharge its onus while alleging that there was an outflow of funds from India by assessee or receivables from Rabobank London have been squared off for diversion of funds to syndicate for advancing loan to Tata Tea UK. The assessee cannot be expected to prove negative. The onus is on the Department to substantiate that the assessee has advanced amount to Rabobank London for loan to Tata Tea UK or assessee’s funds have been diverted in any manner to fund part of said loan. We find that the TPO and the assessing Officer in draft assessment order has placed reliance solely on the letters furnished by an employee of the assessee without there being any corroborative evidence for making addition u/s.69 of the Act.

The second limb of presumption is that the commitment charges received by the assessee are in fact, part of interest income on the loan advanced. The assessee has clarified that the role of assessee was limited to identifying and referring the opportunity to Rabobank London. Rabobank London is the lead arranger for the loan and the other financial institutions/banks joined hands to form a consortium for extending loan facility to Tata Tea UK. The assessee is remunerated for the services rendered by way of share in upfront fee, participation/commitment fee. The share in participation/commitment fee at some percentage (0.40%) of the credit allocation of GBP37.5 million was the method of remunerating the assessee for the functions performed. Since, we have already held that the assessee had not participated in extending loan facility to Tata Tea UK through the consortium in any manner whatsoever, the remuneration received by the assessee in lieu of the services rendered cannot be termed as interest income of the assessee from the alleged advancing of loan. The aforesaid income received by the assessee has already been offered to tax, this fact has not been disputed by the Revenue.

TPO cannot decide necessity of expense for business

In the instant case the assessee has borrowed funds from Rabobank Hong Kong to finance its working capital requirements. The interest paid to Rabobank Hong Kong on ECB has been reflected in the books. Tax has been duly deducted on the payment of interest. Similarly, in respect of guarantee fee and service fee the assessee has been able to substantiate that the payments have been made for the purpose of assessee’s business. The TPO cannot sit in the judgment whether these expenses were necessary for conducting the business or whether any benefit has been derived from the expenditure so incurred. The requirement of the law is that the expenditure should have been incurred ‘wholly and exclusively’ for the purpose of business. This fact has not been disputed by the Assessing Officer. In the result, appeal by the Revenue for assessment year 2006-07 is dismissed.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The appeal by the Revenue in ITA No.1584/Mum/14 for 2006-07 is directed against the assessment order dated 07/01/2014 passed under section 143(3) r.w.s. 147 and 144C(13) of the Income Tax Act, 1961 ( in short ‘the Act’). The appeal by Revenue in ITA No.1583/Mum/2014 for assessment year 2007-08 is directed against the assessment order dated 07/01/2014 passed under section 143(3) r.w.s. 147 and 144C(13) of the Act. The assessee has filed cross objections in appeal by the Revenue for assessment year 2007-08. Since, the issues involved in both these appeals and cross objections are inter connected, these appeals are taken up together for adjudication and are decided by this common order.

2. Both the appeals have been filed with a delay of four days. Shri A. Mohan representing the Department referred to application dated 20/01/2021 filed by the Department stating reasons for delay in filing of the appeals. After considering the submissions made in application, the delay in filing of appeals is condoned and the appeals are admitted to be heard and disposed of on merits.

ITA NO.1584/Mum/2014- A.Y 2006-07:

3. The Revenue has raised following grounds of appeal:

1. “Whether in the facts and in the circumstances of the case and in Law, the Ld. DRP erred in deleting the addition made in draft assessment order on account of TP adjustment of an amount of GBP 37.5 million (Rs.297 crores)?”

2. “Whether in the facts and in the circumstances of the case and in Law, the Ld. DRP erred in deleting the addition made in draft assessment order on account of unexplained investment u/s.69 of the I.T. Act for Rs.297.71 crores?

3. “Whether in the facts and in the circumstances of the case and in Law, the Ld. DRP erred in deleting the addition made in draft assessment order on account of interest on external commercial borrowing?”

4. “Whether in the facts and in the circumstances of the case and in Law, the Ld. DRP erred in deleting the addition made in draft assessment order on account of Guarantee fee paid – Rs.5,63,600/-, Service fee paid – Rs.5,63,600/- and Interest on ECB – Rs.3,90,69,364/- paid to its holding company even though no substantial/ specific service have been rendered by the holding company?”

4. The brief facts of the case as emanating from records are: The assessee is an Indian Company and a 100% subsidiary of Rabobank International Holdings BV. The assessee is a Non Banking Finance Company (NBFC) engaged in providing loans and investment activities in India. During the period relevant to the assessment year under appeal, the assessee entered into following international transactions:

The transactions that are subject matter of dispute in the present appeal are at Sl.No.5, 6 and 7 of the above table. Apart from aforesaid transactions, the Revenue has assailed deleting of addition u/s. 69 of the Income Tax Act, 1961 (herein after referred to as ‘the Act’).

Submissions of the Departments

5. Shri A. Mohan representing the Department submitted that in ground No.1 & 2 of the appeal, the Revenue has assailed the findings of Dispute Resolution Panel (DRP) in deleting the addition made u/s 69 of the Act on account of Transfer Pricing (TP) adjustment of GBP 37.50 million (Rs.297.71 crores). The ld. Departmental Representative submitted that the assessee in consortium with its Associated Enterprises (AE) Rabobank London and other Banks/Financial Institutions had advanced loan to Tata Tea (GB) Ltd. UK (in short ‘Tata Tea UK’). During the course of TP proceedings for assessment year 2008-09 Sh. Chirag Vajrani, the representative of the assessee vide letter dated 27/07/2011 and 06/09/2011 admited that the assessee is part of the consortium for extending loan to Tata Tea UK and has received participation/commitment fee of the credit allocation of GBP 37.5 million. The ld. Departmental Representative pointed that a perusal of letter dated 27/07/2011 would show that the assessee has contributed GBP 37.50 million to loan consortium. In subsequent letter dated 06/09/2011 the same employee of the assessee company changed its stand and stated that the assessee was not part of the consortium but admitted that the assessee has received participation/commitment fee. The ld. Departmental Representative referred to the draft assessment order dated 08/05/2013 and submitted that letters furnished by the assessee are self-contradictory. The assessee has failed to furnish documentary evidence as part of Transfer Pricing study documentation to benchmark the transaction. The assessee has not submitted contemporaneous documents for the period during which the entire loan transaction took place. No documents were submitted by the assessee on the basis of which fees and interest was negotiated and the basis for quantification of GBP 37.50 million allocation to the assessee. The ld. Departmental Representative referred to the findings of Assessing Officer in draft assessment order in para 5.9 to contend that in assessment year 2008-09 an adjustment to the tune of Rs.29.50 crores was made on account of interest foregone in respect of amount advanced to Rabobank London (AE). Since, the assessee failed to disclose the loan advanced, an amount of Rs.297.71 crores in respect of loan extended to Tata Tea UK through consortium was added u/s 69 of the Act. The ld. Departmental Representative vehemently defended the findings of Assessing Officer in draft assessment order. The ld. Departmental Representative finally submitted that the assessee has failed to substantiate that the assessee had not advanced loan to Rabobank London. To discharge its onus, the assessee could have furnished copy of Balance Sheet of Rabobank London.

6. In respect of grounds No.3 & 4 of the appeal, the ld. Departmental Representative submitted that DRP has erred in deleting the addition in respect of interest paid on External Commercial Borrowings (ECB), guarantee fee paid and service fee paid. The assessee allegedly benchmarked the transaction by applying CUP. However, in proceedings before the TPO, the assessee admitted that there was no evidence of carrying out any cost benefit analysis or any benchmark analysis at the time of availing the services. The assessee could not give any valid explanation for incurring expenditure on payment of guarantee fee, service charges and interest on ECB. The DRP deleted the additions without examining the facts by making mere superficial observations. The ld. Departmental Representative prayed for reversing the findings of Assessing Officer and DRP and restoring the addition made in draft assessment order.

Submissions on behalf of Assessee

7. Shri Percy Pardiwala appearing on behalf of the assessee submitted thatthe assessee has not extended any loan facility to Tata Tea UK. The addition u/s 69 of the Act has been made on mere mis-appreciation of the facts and conjunctures. The assessee was instrumental in negotiating with Tata Tea UK for arranging loan through its AE. Since, the quantum of loan required by Tata Tea UK was substantial i.e GBP 160 million, neither the assessee nor AE of the assessee was in a position to extend such huge loan facility solely. The loan was extended to Tata Tea UK by consortium of banks/financial institutions with Rabobank London as lead lender. The assessee being originator of the deal was remunerated with percentage of interest earned. The ld. Counsel for the assessee referring to the letter dated 06/09/2011 pointed that the table given in the said letter would show that a loan of GBP 160 million was extended to Tata Tea UK during the financial year 2005-06 by consortium of six banks /financial institutions. The assessee was not part of that consortium. As per the arrangement the assessee was paid fee only for originating the deal. The assessee was not exposed to any financial risk. The ld. Counsel for the assessee referred to order under section 92CA(3) of the Act for assessment year 2008-09, wherein the letter of the assessee dated 21/09/2011 is reproduced. The said letter clearly states that Rabobank London performed the key functions such as negotiating the pricing terms with Tata Tea UK, invited various banks to participate in the syndication to jointly provide loan to Tata Tea UK. In the same very communication it was categorically denied that the assessee was not exposed to the loan. The assessee only spotted and originated the deal. The ld. Counsel for the assessee pointed that letter dated 27/07/2011 (at page 590 of the paper book) was written by Chirag Vajani, Financial Controller of assessee. It was inadvertently stated in the letter that the assessee is part of consortium. The statement made in the letter was retracted by Mr. Vajani in his affidavit dated 04/03/2013 (at page 1044 to 1047 of the paper book). Thus, the statement made on behalf of the assessee by Chirag Vajani was retracted.

7.1. The ld. Counsel for the assessee submitted that a perusal of letter dated 17/01/2013 at page 1036 and 1037 of the Paper Book would show that Rabobank Singapore had clarified that in lieu of assessee originating the loan transaction and getting the opportunity to issue the credit allocation, is entitled to fee equivalent to 2/8th of the net income earned by Rabobank Singapore under loan transaction. The fee received by assessee through Rabobank Singapore was offered to tax. The transaction between the assessee and Rabobank Singapore was found to be at arm’s length and the same was accepted by the Department.

7.2. The ld. Counsel for the assessee further referred to the letter dated 28/09/2011 from Rabobank London at page 1034 and 1035 giving the list of banks/financial institutions that were part of consortium for extending loan to Tata Tea UK and the extent of loan facility provide by each of the participants of consortium. The ld. Counsel for the assessee pointed that the name of the assessee does not find mention in the said letter. The ld. Counsel for the assessee further referred to Global Substitution Certificate at page 961 and 962 of the paper book to show the names of banks/financial institutions that had contributed to the loan facility extended to Tata Tea UK. The ld. Counsel for the assessee referring to the above document furnished in the paper book contended that the documents on record clearly indicate that the assessee never extended any loan facility to the Tata Tea UK. Since, the assessee was not part of consortium for extending loan there was no occasion for the assessee to furnish any loan documents in the TP study documentation.

7.3. The ld. Counsel for the assessee pointed that the observation of the Assessing Officer in draft assessment order are purely based on surmises and conjectures. The cloud of suspicion arose in the mind of Assessing Officer from two letters i.e. dated 27/07/2011 and 06/09/2011, wherein inadvertently Mr. Chirag Vajani, made same statements which were factually incorrect. The said statements were subsequently retracted by filing an affidavit. The ld. Counsel for the assessee submitted that if the assessee would have extended loan to overseas entity in a clandestine manner, without proper approval, apart from beaching Income tax Act, it would have also violated the provisions of Company Law, FEMA and various other laws that would have attracted major penalty. The ld. Counsel to support his argument placed reliance on the decision in the case of A.S. Sivan Pillai vs. CIT, 34 ITR 328(Mad).

8. In respect of ground No. 3 and 4 of the appeal, the ld. Counsel for the assessee submitted that the assessee had availed ECB loan under automatic route. The assessee had availed ECB to finance its working capital requirement in India. The interest on ECB paid to Rabobank Hong Kong was offered to tax in its return of income for the relevant assessment year. The assessee complied with TDS provisions on said interest payment. The assessee referred to Facility letter from Rabobank Hong Kong at pages 1119 of paper book. The ld. Counsel for the assessee submitted that all the relevant documents were filed before the TPO to substantiate that ECB loan facility was availed for business purpose only. The DRP accepted the contentions of the assessee and deleted the adjustment.

The ld. Counsel for the assessee further contended that the assessee had paid guarantee fee to Rabobank Hong Kong for the loan guaranteed by the said AE. The assessee had extended loans to Noble Grain/Siddarth Soya. The interest on said loan was guaranteed by Rabobank Hong Kong. In case of default in payment of interest, the assesse would have recovered the interest amount from Rabobank Hong Kong. The assessee paid guarantee commission/fee to Rabobank Hong Kong after deducting tax at source. These facts have not been disputed. Consequently, the DRP deleted adjustments.

8.1. With regard to payment of service fee, the ld. Counsel for the assessee submitted that the assessee had sought advisory services from Rabobank Netherlands in respect of certain specialized project undertaken by it. The TPO has not disputed rendering of services nor the TPO disputed arm’s length of transactions. The only reason for making adjustment is ‘benefit test’. The TPO has acted beyond jurisdiction in questioning benefit of services. The ld. Counsel for the assessee prayed for upholding the findings of DRP in respect of payment of interest on ECB, guarantee commission and fee for advisory services.

Findings:

9. We have heard the submissions made by rival sides at length and have examined the documents on record. In ground No. 1 and 2 of the appeal, the Revenue has assailed the finding of DRP in deleting the addition of Rs.297.71 Crores (GBP 37.5 million) made under section 69 of the Act. The contention of Revenue is that the assessee was part of consortium that had extended loan to Tata Tea UK. The Revenue has placed reliance on letters dated 27/07/2011 and 06/09/2011 written by one Mr. Chirag Vajani, Financial Controller of the assessee to the TPO in assessment proceedings for AY 2008-09. In letter dated 27/07/2011 the list of participants that had extended credit facility to Tata Tea UK has been given. The name of assessee figures in that list and against the name of the assessee it has been mentioned that the assessee has extended credit facility to the tune of GBP 37.5 million. In the subsequent letter dated 06/09/2011 Chirag Vajani repudiated that the assessee was part of syndicate for extending loan. However, he stated that the assessee was paid participation/commitment fee of GBP 1,50,000 @ 0.40% of the credit allocation. The aforesaid letters do create an impression that the assessee in some manner was part of consortium that extended credit facility to Tata Tea UK. Later, Chirag Vajani retracted from the statements made in the aforesaid letters by filing an affidavit dated 04/03/2013 (page 1044 to 1047 of the paper book).

10. Further, to substantiate that the assessee was not part of consortium that had extended credit facility to Tata Tea UK, the assessee furnished various documents which inter-alia include; confirmation from Rabobank London (at page 958 of the paper book), Global Substitution Certificate giving list of participants (at pages 961 and 962 of the paper book), communication dated 19/09/2011 and 28/09/2011 from Rabobank London (at pages 1033 and 1034 of Paper Book), a communication dated 17/01/2013 from Rabobank Singapore regarding credit allocation of Rabobank London (at pages 1036 and 1037 of the paper book). From perusal of documents furnished by the assessee, inevitable conclusion that can be drawn is that the assessee was only instrumental in originating transaction for extending credit facility to Tata Tea UK. The assessee forwarded the opportunity to Rabobank London, its AE. Since, exposure to credit facility sought by Tata Tea UK was substantial, Rabobank London along with other participating banks/financial institutions formed a consortium for extending the credit facility. Rabobank London vide letter dated 28/9/2011 (at page 1034 of paper book) has given the details of constituents of consortium and the credit facility extended by each of them. Rabobank London retained GBP 77.5 million and syndicate contributed GBP 82.5 million:

In the aforesaid communication it is again reiterated that the loan to Tata Tea UK was granted by Rabobank London from funds in its Balance Sheet after borrowings from the market and in syndication with other members. No part of the loan provided to Tata Tea UK was funded by the assessee or any entity acting on behalf of the assessee. It was further clarified that Rabobank London provided loan on its own behalf and not on behalf of the assessee.

11. In the present case, the reason for invoking provisions of section 69 of the Act germinates from the contents of letters dated 27/07/2011 and 06/09/2011 written by one of the employee indicating that the assessee has extended loan of GBP 37.50 million as per part of syndicate and the participation/commitment fee of GBP 1,50,000 has been received by the assessee. Apart from the said letters, there is no other material on record to corroborate that the assessee in any manner participated in extending loan facility to Tata Tea UK as part of consortium/syndicate. In the first place the Assessing Officer has failed to take note of the fact that the contents of letter on the basis of which addition u/s.69 of the Act was made, were retracted by way of affidavit. Further, the addition cannot be made solely on the basis of phraseology of the submissions made during proceedings. There has to be substantive evidence on record to corroborate with the statements.

12. The findings of the TPO and the Assessing Officer in draft assessment order that the assessee has advanced loans from undisclosed sources is merely based on surmises and conjunctures. It is a well settled legal proposition that suspicion, howsoever strong, cannot take place of evidence. Except from the letters referred above there is no material to back the observations made by the TPO/AO. On the contrary, the assessee has furnished various documents to substantiate that the assessee was not part of syndicate that has extended loan facility to Tata Tea UK, however, the same have been ignored by the TPO and the assessing officer while passing the draft assessment order. In the absence of any cogent evidence, the Revenue has failed to discharge its onus while alleging that there was an outflow of funds from India by assessee or receivables from Rabobank London have been squared off for diversion of funds to syndicate for advancing loan to Tata Tea UK. The assessee cannot be expected to prove negative. The onus is on the Department to substantiate that the assessee has advanced amount to Rabobank London for loan to Tata Tea UK or assessee’s funds have been diverted in any manner to fund part of said loan. We find that the TPO and the assessing Officer in draft assessment order has placed reliance solely on the letters furnished by an employee of the assessee without there being any corroborative evidence for making addition u/s.69 of the Act.

13. The second limb of presumption is that the commitment charges received by the assessee are in fact, part of interest income on the loan advanced. The assessee has clarified that the role of assessee was limited to identifying and referring the opportunity to Rabobank London. Rabobank London is the lead arranger for the loan and the other financial institutions/banks joined hands to form a consortium for extending loan facility to Tata Tea UK. The assessee is remunerated for the services rendered by way of share in upfront fee, participation/commitment fee. The share in participation/commitment fee at some percentage (0.40%) of the credit allocation of GBP37.5 million was the method of remunerating the assessee for the functions performed. Since, we have already held that the assessee had not participated in extending loan facility to Tata Tea UK through the consortium in any manner whatsoever, the remuneration received by the assessee in lieu of the services rendered cannot be termed as interest income of the assessee from the alleged advancing of loan. The aforesaid income received by the assessee has already been offered to tax, this fact has not been disputed by the Revenue. We find no merit in ground No.1 and 2 raised by the Revenue in appeal, the same are dismissed, accordingly.

14. In grounds No. 3 and 4 of appeal, the Revenue has assailed deleting of addition in respect of interest paid on External Commercial Borrowings (ECB), payment of guarantee fee and service fee. The aforesaid charges/payments have been disallowed primarily for the reason that the assessee has not been able to establish need for the services and the benefit derived from the said services. Undisputedly, the assessee furnished guarantee agreement and ECB agreement. The same have not been disputed by the TPO. The assessee has benchmarked the transaction by applying CUP as the most appropriate method. The role of TPO is limited to determine ALP of the international transaction. The TPO cannot question the need or/and benefit derived from the international transaction. The Hon’ble Bombay High Court in the case of CIT vs. Lever India Exports Ltd., 292 CTR 393 has held that the jurisdiction of the TPO is only to determine ALP by applying most appropriate method specified under section 92C(1) of the Act. It is not the domain of TPO to determine allow ability of the expenditure. Similar view has been expressed in the case of CIT vs. EKL Appliance Ltd. 345 ITR 241 (Delhi). The Hon’ble Delhi High Court held that the TPO cannot question commercial expediency of the transaction or the quantum of benefit derived.

15. In the instant case the assessee has borrowed funds from Rabobank Hong Kong to finance its working capital requirements. The interest paid to Rabobank Hong Kong on ECB has been reflected in the books. Tax has been duly deducted on the payment of interest. Similarly, in respect of guarantee fee and service fee the assessee has been able to substantiate that the payments have been made for the purpose of assessee’s business. The TPO cannot sit in the judgment whether these expenses were necessary for conducting the business or whether any benefit has been derived from the expenditure so incurred. The requirement of the law is that the expenditure should have been incurred ‘wholly and exclusively’ for the purpose of business. This fact has not been disputed by the Assessing Officer. We find no merit in ground No. 3 and 4 of the appeal by the Revenue, hence, dismissed.

16. In the result, appeal by the Revenue for assessment year 2006-07 is dismissed.

ITA NO.1583/MUM/2014 (A.Y. 2007-08) & C.O.73/MUM/2014:

17. The Revenue in appeal has raised solitary ground. The same reads as under:

“Whether in the facts and in the circumstances of the case and in Law, the Ld. DRP erred in directing the Assessing Officer not to charge any notional interest on the unexplained investment of Rs.297 crores as the DRP for the A.Y.2006-07 has deleted the addition even though the Department is filing 2nd appeal to the ITAT for A.Y.2006-07?”

18. The ground of appeal in assessment year 2007-08 is a corollary to the issues raised by the Revenue in appeal for assessment year 2006-07. Since, we have dismissed the grounds raised in appeal by the Revenue for assessment year 2006-07, the bedrock of the ground raised by the Revenue in assessment year 2007-08 has eroded hence, the ground does not survive. Consequently, the appeal by the Revenue for assessment year 2007-08 is dismissed.

19. The ld. Counsel for the assessee stated at the Bar that he is not pressing the Cross Objections. Consequently, the same are dismissed as not pressed.

20. To sum up, the appeals of the Revenue for assessment years 2006-07 and 2007-08 and the cross objections filed by the assessee for 2007-08 are dismissed.

Order pronounced in the open court on Friday, the 26th day of March, 2021.