IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES "K", MUMBAI
Before Shri Vijay Pal Rao, JM & Shri N K Billaiya, AM
./ ITA No.825/Mum/2014
[ [ / Assessment Year 2009-2010
M/s. Bhansali & Co. The ACIT 16(3),
EE-7010 Bharat Diamond Mumbai.
Bourse, Bandra Kurla Complex, Vs.
Bandra (E), Mumbai- 400 051
( /Appellant) (×/Respondent)
Appellant By : Shri Apurva R Shah
Respondent By : Shri K C P Patnayak
Date of Hearing :02.12.2014. Date of Pronouncement : 05.12.2014
/ O R D E R
Per N K Billaiya, AM:
This appeal by the assessee is preferred against the order dated 20.01.2014
made u/s. 143(3) r.w.s 144C of the Act for A.Y. 2009-10.
2. The assessee is a partnership firm engaged in the business of manufacture of
cut and polished diamonds and in sale thereof including exports. The return for the
year was filed on 29.09.2009 declaring total income of Rs.1,31,92,121/-. The return
was selected for scrutiny assessment and accordingly statutory notices were issued
and served upon the assessee.
Bhansali & Co.
3. During the course of scrutiny assessment proceedings, as per the audit
report in Form No.3CEB filed by the assessee, the AO noticed that the assessee has
undertaken international transactions with its associate enterprises exceeding Rs.15
crores. The case was referred to the Transfer Pricing Officer (TPO) u/s. 92CA(1) of
the Act for determination of the arm's length price of the international transactions.
The international transactions of the assessee are as under:
Sr. Name of the associated Nature of Transaction Amount
1 Prism Diamonds Inc. Export of cut & polished diamonds 4,61,70,305
2 Prism Diamonds Inc. Purchase of cut & polished diamonds 2,04,13,140
3 Bhansali & Co. (HK) Ltd. Export of cut & polished diamonds 63,97,78,032
4 Bhansali & Co. (HK) Ltd. Loan (loan outstanding from 2,50,000
01.04.2005, loan amount Rs.53.47
lakhs/- @7.25% and accrued
interest thereon as in the earlier
years, repaid in full in February 2009
The TPO noticed that the assessee has given loan to its associate enterprises
amounting to Rs.53.47 lacs. It was also observed that the associate enterprise has
repaid the loan on 27.02.2009 in full. The TPO further observed that the assessee
has offered Rs.2.50 lacs towards interest income. The details were also filed by the
assessee in respect of interest receivable on the loans advanced to the associate
enterprise. It was explained by the assessee that one year LIBOR was 2.12% The
interest rate for the loan given by the assessee comes to 4.12%, which is equivalent
to Rs.2,27,461. As the assessee has offered Rs.2,50,000 as interest income, it was
contended that interest received is at arm's length. The submissions of the
assessee were examined by the TPO. It was found that the assessee has
benchmarked loan transactions at LIBOR plus 200 basis points. The TPO was of the
opinion that here is no reason on the basis of which 200 basis points have been
applied. The TPO proposed to apply arm's length interest @12%. The assessee
contended that the effective rate worked out by the assessee is 7.81%. It was
further explained that the assessee has been benchmarking the same rate since
A.Y. 2005-06. The contention of the assessee did not find favour with the TPO,
Bhansali & Co.
who proceeded by applying LIBOR plus 500 basis points and computed the interest
at Rs.3,93,088/-. Since the assessee has offered Rs.2,50,000 the effective
adjustment was determined at Rs.1,43,088/- Draft assessment order was made by
the AO vide order dated 28.03.2013. The assessee objected the said adjustment
before the Dispute Resolution Panel (DRP). It was claimed that the outstanding
loan of Rs.53.47 lacs was given to the associate enterprise in past and the entire
loan has been repaid back on 27.02.2009. It was further brought to the notice of
the DRP that the interest rate adopted by the assessee has been applied by the
assessee for the past four years and the ALP has been accepted by the TPO. The
DRP did not agree with the LIBOR plus 500 basis points approach adopted by the
TPO. According to the DRP the money was loan from India. Therefore, the interest
charged from its associate enterprise should be equivalent to the domestic cost of
borrowing. The DRP directed the TPO/AO to consider the ALP @10.81%.
Aggrieved by this the assessee is before us qua ground no.1.
4. The counsel for the assessee stated that the loan was given to the wholly
owned subsidiary company in the year 2005, which was fully repaid on 27.02.2009.
The assessee had adopted the rate of interest, which was LIBOR plus 200 basis
points. The DRP has taken the average cost of domestic borrowing plus 300 basis
points i.e. 10.81%, which is against the facts of the case. The counsel further
stated that same rate of interest has been accepted at arm's length in transfer
pricing for A.Ys. 2005-06 to 2008-09. Therefore, deviation from the earlier
assessment years breaches rule of consistency. The DR strongly supported the
findings of the lower authorities.
5. We have carefully perused the orders of the authorities below. It is an
admitted fact that the loan was given in the year 2005. It is also undisputed fact
that interest rate charged as LIBOR plus 200 basis points have been accepted in
completed assessments from AYs 2005-06 to 2008-09. Thus, by taking a different
view on the same set of facts violates the rule of consistency. Secondly, the DRP
erred in considering the loan as loan from India. The fact of the matter is that it
was a foreign currency loan which was given abroad. Therefore the most
appropriate method is taking the LIBOR as correct benchmark. A similar view has
Bhansali & Co.
been taken by the Tribunal in the case of Hinduja Global Solution Ltd. 145 ITD 361.
Considering the past history and the decision of the Tribunal (supra), we find that
the benchmarking done by the assessee is correct and the AO is directed to delete
the addition. Ground no.1 with its sub ground is allowed.
6. The second grievance of the assessee relates to the disallowance of
Rs.1,48,61,119 u/s. 40A(2)(b) of the Act. At the very outset the counsel for the
assessee brought to our notice the decision of the Tribunal in the assessee's own
case for A.Y. 2005-06. It is the say of the counsel that on the same set of facts, the
Tribunal has set aside the order of the CIT(A) and restored the matter to the files of
the AO. The DR fairly conceded to this.
7. We have carefully perused the grievance of the assessee viz-a-viz the order
of the Tribunal in ITA no. 2282/Mum/2010 for A.Y. 2005-06. We find that a similar
issue has been considered by the Tribunal at para 5 of its order and held as under:-
"12. In our opinion, neither the assessee has provided any
comparable rates to the revenue authorities nor the revenue
authorities have made any attempt either by asking the assessee to
provide for the comparable nor they suo moto collected any data from
the market. What the revenue authorities have done is that they have
relied on the internal comparable only to arrive at a figure of
estimated charges per carat. In fact, the AO should have collected
independent data or have asked the assessee to provide comparable
periodic rates prevailing in the market at Deesa to set the bench mark.
This exercise has not been done by the AO or by the CIT(A), which
according to us, the revenue authorities should have done to arrive at
some definite estimate.
13. In these circumstances, we are of the opinion that in the
interest of justice to both the sides, the AO must make enquiries and
examine the comparable rates from the third parties at Deesa and
then benchmark the average job work rate for the financial year in
question and compute the job work charges.
14. We, therefore, set aside the order of the CIT(A) on the issue of
addition of Rs. 43,97,624/- with the above direction to the AO, who
shall afford adequate and reasonable opportunity to the assessee to
present its case."
Bhansali & Co.
8. As no distinguishing fact has been brought to our notice, respectfully,
following the decision of the co-ordinate Bench, the matter is restored to the file of
the AO to be decided afresh in the light of the direction given by the Tribunal in A.Y.
2005-06 (supra). Ground no.2 is treated as allowed for statistical purpose.
9. Ground no.3 relates to disallowance of deduction for donations made u/s.
80G of the Act. The counsel for the assessee stated that for some reason the
donation receipts could not be produced before the AO. Further, if one more
opportunity is given, necessary details will be submitted before the AO. As we have
restored the matter relating to ground no.2 to the files of the AO, in the interest of
justice and fair play, we direct the AO to consider the documentary evidence
submitted by the assessee for the claim of deduction on account of donation u/s.
80G of the Act. The assessee is directed to submit necessary details in support of
its claim. Ground no.3 is allowed for statistical purposes.
10. In the result, the appeal filed by the assessee is allowed in part for statistical
Order pronounced in the open court on this 5th day of December, 2014.
(Vijay Pal Rao) (N K Billaiya)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai; Dated : 5th December, 2014.
/Copy of the Order forwarded to :
1. /The Appellant.
2. × / The Respondent.
3. () / The CIT(A), Mumbai.
4. / CIT
5. , , / DR, `K' Bench, ITAT, Mumbai
/ BY ORDER,
× //True Copy//
/ (Dy./Asstt. Registrar)
, / ITAT, Mumbai