,
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES `K' MUMBAI
[^ .. , Û ^ , ¢
BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER /AND
SHRI SANJAY ARORA, ACCOUNTANT MEMBER
ITA NO.322/MUM/2014 (A.Y.2008-09)
Tricom India Limited, ITO-8(3)(3),
Gandhi Estate, 202, 2ND Floor, Aaykar Bhavan,
A.K.Road, Safed Pool, Sakinaka, Vs. M.K.Road, Mumbai 400020
Andheri Kurla Road,
Mumbai 400072 (Respondent)
PAN: AAACT 2807R
(Appellant )
ITA NO.70/MUM/2014 (A.Y.2008-09)
ITO-8(3)(3), Tricom India Limited,
202, 2ND Floor, Aaykar Bhavan, Gandhi Estate,
M.K.Road, Mumbai 400020 Vs. A.K.Road, Safed Pool,
Sakinaka,
Andheri Kurla Road,
Mumbai 400072
PAN: AAACT 2807R
(Appellant ) (Respondent)
C.O.NO.27/MUM/2014
(Arising out of ITA No. 70/MUM/2014 (A.Y.2008-09)
Tricom India Limited, ITO-8(3)(3),
Gandhi Estate, 202, 2ND Floor, Aaykar Bhavan,
A.K.Road, Safed Pool, Sakinaka, Vs. M.K.Road, Mumbai 400020
Andheri Kurla Road,
Mumbai 400072
PAN: AAACT 2807R
(Cross Objector ) (Appellant in Appeal)
Assessee by : Shri Ankit Verendra Sudha Shah
Revenue by : Shri Sanjiv Jain
Date of hearing : 03/09/2014
Date of pronouncement : 03/09/2014
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C.O.NO.27/MUM/2014
ORDER
PER BENCH:
These are cross appeals and assessee has also filed Cross Objection. All of
them are directed against order passed by Ld. CIT(A)-15, Mumbai dated 07.10.2013
for assessment year 2008-09. Grounds of appeal in both the appeals and Cross
Objection read as under:
Grounds of Assessee's Appeal:
GROUND I
1. On facts and circumstances of the case and in law, the Learned Commissioner of
Income-tax (Appeals)-15, Mumbai [`CIT(A)'] erred in upholding the order of the Income-tax
Officer 8(3)(3), Mumbai (`the AO') to disallow the deduction under Section 10B of the
Income-tax Act, 1961 (`the Act') on interest income of Rs. 3,47,77,584/- of the Appellant
Company so received from fixed deposits with banks and other entities.
2. He failed to appreciate and ought to have held that
Section 1OB(1) read with Section 1OB(4) of the Act specifically provides for deduction
from the total income of an assessee of the profits and gains `derived by' the export
oriented undertaking in the previous year, which implies that any income received by
the undertaking shall be entitled for deduction under Section 1OB of the Act;
ii. That the expression `derived by' used in Section 1OB of the Act implies that the said
undertaking should be recipient of said profit and gains as against the expression
`derived from' the undertaking, which means that the profit and gains should have
direct source from the activities of the said undertaking to become eligible for the
deduction;
iii. the decisions in Appellant's own case for earlier AYs including other legal precedents
so sought to be relied to hold this ground against the Appellant Company have failed to
appreciate that either the said decisions have been delivered in context of provisions
other than Section 1O of the Act which have used the expression `derived from' as
against `derived by' in Section 1OB and/or in case if some of the decision so relied
which have considered provisions using expression similar to Section 1OB have either
been set aside by the Apex Court or aforesaid averments have not been relied and/or
considered by them;
iv. It is an undisputed fact which has been accepted by the Respondent over the years,
that interest income as derived from fixed deposit with banks and other entities have
been received and utilized in the business of said undertaking as the Appellant
Company is 100% export oriented undertaking; which otherwise substantiates the
eligibility of the said interest income for deduction under Section 1OB of the Act; and
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C.O.NO.27/MUM/2014
v. Unlike deduction under Chapter VI-A of the Act, Section 1OB does not provide for
provisions that income derived from profits and gains of eligible business should be
considered as the only source of income for the purpose of deduction. The absence of
such provisions under Section 1OB corroborates the intention of the Legislature to
provide for deduction on other income viz, interest income in the present case which is
received by the business of undertaking for deduction under Section 1OB of the Act.
3. In view of above averments, the Appellant therefore humbly prays before your
Honour's to kindly direct the AO to allow deduction of Section 1OB on the aforesaid
impugned interest income received by the business of the undertaking
Ground II
1. On facts and circumstances of the case and in law, the Ld. CIT(A) erred in upholding
the order of the AO to assess the aforesaid impugned interest income of Rs.
3,47,77,584/- under the head `Income from Other Sources'
2. He failed to appreciate and ought to have held that
i. the Appellant Company had been consistently offering the aforesaid incomes as
business income over the years, which was duly accepted by the Income-tax Authorities
earlier;
ii. the principle of consistency required the AC to assess the aforesaid incomes as
business income, instead of income from other sources;
iii. interest income have arisen in the course of achieving the business activity of the
Appellant Company of export of software; and
iv. the Memorandum and Articles of Association of the Appellant Company authorize the
Appellant to undertake business of providing interest bearing loans to domestic parties
and AEs;
3. In view of the above averments, the Appellant Company humbly prays before your
Honour's to kindly direct the AC to assess the interest income under the head "Profits
and gains from business or profession".
Ground III
1. On facts and circumstances of the case and in law, the Ld. CIT(A) erred in rejecting
the Arm's Length price (`ALP') determined by the Appellant Company by benchmarking
the international transaction of interest income received by the Appellant Company on
loans advanced to Tricom Document Management mc, an US based wholly owned
subsidiary and thereby Associated Enterprise (`AE') of the Appellant Company;
2. He failed to appreciate and ought to have held that:
i. the rate of interest of `LIBOR + 300 basis point' as determined as ALP by the Ld. CIT(A)
was not correct and in violation of the Comparable Uncontrolled Price (`CUP') Method as
provided in Section 92C read with Rule 1OB of the Income-tax Rules, 1962;
ii. the CUP Method requires that the controlled transaction of rate of interest charged on
loan advanced by the Appellant to its AE should be compared with the rate of interest on
loan advanced among independent parties in comparable circumstances;
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C.O.NO.27/MUM/2014
iii. the comparison made by the Ld. CIT(A) to benchmark the aforesaid international
transaction by considering the rate of interest on a transaction of loan availed in London
Markets was unjustified;
iv. the loan was advanced by the Appellant Company to AE in USA and in US currency
therefore, it was necessary to benchmark the rate of interest with rates prevailing in
USA. The US Fed rates also referred to as Fed Fund Target Rate (`FFTR') is America's
most important and most influential benchmark interest rate. The FFTR can be described
as the "main" or "key" interest rate for the United States. The interest rate-setting
Federal Open Market Committee (FOMC) uses the FFTR as its most potent tool for
regulating the US economy; and
v. the US Fed and LIBOR rates are reflective of the fact of rate of interest prevailing in
different countries at different points in time and therefore, since the transaction was
undertaken in US markets, so the US Fed rate was reflective of benchmark rate of
interest to be considered in light of principles of the Transfer Pricing provisions of the Act
3. In view of the above averments, the Appellant Company therefore prays that the ALP
as determined by the Appellant by benchmarking the aforesaid impugned international
transaction at `US Fed Rate + 250 basis point' should be accepted.
Without prejudice to above, even the amount of upward adjustment of Rs. 22,99,574/-
determined by the AO w.r.t. aforesaid issue is not properly computed and there are
various clerical! arithmetic errors made in the said computation and therefore, the
Appellant prays that AO be directed to rectify the same.
Ground IV
1. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in not
assessing the correct total income of the Appellant Company as per the provisions of the
Act by not providing the relief of tolerance band under the provisions of Section 92C(2) of
the Act while effecting transfer pricing adjustment to the ALP computed for impugned
international transaction of loan advanced by the Appellant to its AE;
2. He failed to appreciate and ought to have held that
i. the total income of the Appellant including the impugned transfer pricing adjustment
should have been assessed after providing all due reliefs, deductions, etc irrespective of
whether claimed or otherwise, as available under the provisions of the Act and in law;
ii. as per the first proviso to Section 92C(2) of the Act, if there are more than one price
determined by the most appropriate method, then the ALP shall be considered after
providing relief of tolerance band to the arithmetical mean of such prices; and
iii. the US Fed and LIBOR rate of interest considered for benchmarking the aforesaid
international transaction is also an average rate of comparable uncontrolled interest at
which various panel banks are willing to borrow or lend interbank offers;
3. In view of the above, the Appellant Company prays that the AD be directed to provide
relief under Section 92C (2) of the Act before making any transfer pricing adjustment in
determination of ALP for the impugned international transaction.
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C.O.NO.27/MUM/2014
Ground V
1. Without prejudice to Grounds referred in above, on facts and circumstances of the
case and in law, the Ld. CIT(A) erred in not computing the correct total income by not
providing deduction of donation paid of Rs.10,48,837 under Section 80G of the Act,
under normal provisions of the Act.
2. He failed to appreciate and ought to have held that:
i. deduction under Section 80G was restricted to only Rs. 25,525/-, as against the
Appellant Company is entitled to deduction of Rs. 5,10,500/-;
ii. Without doubting the authenticity of the donation so made by the Appellant Company;
the deduction under Section 80G was restricted to Rs 25,525/-; and
iii. the necessary supporting documents viz, donation receipts, confirmation, and/or
certificate of registration of the aforesaid trust, etc, as available with the Appellant
Company shall be submitted during the course of hearing;
3. In view of above, the Appellant Company prays that the AC be directed to provide
deduction under Section 80G while computing total income under the normal provisions
of the Act.
Ground VI
The Appellant Company prays that the Ld. CIT (A) erred in not directing the AC to levy
interest under Section 234B and Section 234C of the Act to the extent disclosed in the
return of income.
Without prejudice, the Appellant Company prays that the AC be directed to recompute
the interest u/s. 234C correctly, since based on the facts on the case and in law, the
present interest charged by the AC is excessive and not correct.
GROUND VII
The Appellant craves leave to add to, alter and/or amend the above grounds of appeal
at the time of hearing.
Grounds of Revenue's Appeal:
i. "Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A)
erred in not upholding the action of the Transfer Pricing Officer of applying the average
domestic borrowing rate to compute the Arm's Length Price rate chargeable by the
assessee from its Associate Enterprises, without appreciating that by charging the AE
interest @ 7.5%, the assessee had not even recovered its cost of borrowing which ranged
from 15% to 18%?"
ii. "Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A)
erred in applying LIBOR since LIBOR is not the rate of consideration for loans where
currency is to be bought and the rate of interest to be charged from the Associate
6 ITA NO.322& 70/MUM/2014 (A.Y.2008-09)
C.O.NO.27/MUM/2014
Enterprises should have factored risk elements such as exchange rate fluctuation risk,
country specific risk and entity risk?"
iii. "Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A)
erred in not appreciating that the LIBOR rate is set up using a basket of foreign
currencies and the INR is not a part of it?"
iv. "Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A)
erred in ignoring that in the case of Aurion Pro Solutions Ltd., the "K"-Bench of Hon'ble
ITAT, Mumbai [TS-75.ITAT-2013(Mum).TP, Order dated 21.04.2013] had opined that the
interest that would have been earned by the assessee in advancing or placing the said
amount with unrelated parties would be the Arm's length interest in relation to the
interest free loans I advanced to the AE and that the safest comparables, which can be
taken as Arm's Length interest rate in such a case would be the interest on FD with the
bank for a term equivalent to the term for which the loans given to the AEs?"
v. "The appellant prays that the order of the CIT (A) on the above grounds be set aside
and that of the A.O. be restored."
Grounds of Assessee's Cross Objections:
Without prejudice to Grounds of Appeal as filed on 13 January 2014, with the Registrar,
ITAT in the Respondent's Appeal No. 322/M/2014 for the captioned Assessment Year
GROUND I
1. On facts and circumstances of the case and in law, the Ld. CIT(A) as well as AO erred
in determining the Arm's Length price (`ALP') of the international transaction of interest
income received by the Respondent Company on loans advanced to Tricom Document
Management Inc, an US based wholly owned subsidiary and thereby Associated
Enterprise (`AE') of the Respondent Company, by benchmarking the said international
transaction with a rate of interest of `LIBOR + 300 basis points' and `average domestic
rate of interest of around 16%', respectively, without appreciating the provisions of
Section 92C of the Income-tax Act read with Rule 1OB and Rule 10C of the Income-tax
Rules 1962
2. They failed to appreciate and ought to have held that:
i. the Respondent Company was dependent upon its said AE for want of ITES services
effected in US through the said AE and in turn the AE was dependent upon the
Respondent Company for want of its financial support;
ii. the said AE was a major vendor of the ITES services for the Respondent Company
and therefore is significantly dependent upon its AE for revenues and vice-versa, the AE
was significantly dependent upon its Respondent holding Company for its finances;
iii. the CUP Method requires that the controlled transaction of rate of interest charged on
loan advanced by the Appellant to its AE should be compared with the rate of interest on
loan advanced among independent parties in comparable circumstances;
7 ITA NO.322& 70/MUM/2014 (A.Y.2008-09)
C.O.NO.27/MUM/2014
iv. the comparison made by the Ld. CIT(A) and AO to benchmark the aforesaid
international transaction by considering the rate of interest on a transaction of loan
availed in London Markets and Indian markets therefore are unjustified; and
v. Therefore, in light of the provisions of Section 92C read with Rule 1OB and Rule 1OC
and legal precedents thereof on the subject as well as for the fact that both the parties
are dependent upon each other, the ALP for the impugned international transaction
should have been benchmarked at Nil rate of interest.
3. In view of the above averments, the Appellant Company therefore prays that the ALP
as determined by the Ld. CIT(A) and AO by benchmarking the said international
transaction with respective rates of interest referred in above should be rejected.
2. During the course of hearing it was pointed out by Ld. AR that all the above
issues are covered by the earlier decisions of the Tribunal. He has submitted a chart
which was taken into consideration and both the parties were heard on the basis of
the said chart which is placed on record.
3. Ground No.I, raised in the appeal filed by the assessee relates to eligibility or
otherwise of interest income earned by the assessee under section 10B of the Income
Tax Act, 196(the Act). This issue is covered against the assessee by the earlier order
of the Tribunal in assessee's own case for A.Y 2007-08. Reference in this case was
made to the decision of the Tribunal dated 3/05/2013 in ITA No.8058/Mum/2011,
ITA No.8540/Mum/2011, ITA No.8597/Mum/2011 & CO No.225/Mum/2012. The
relevant observations of the Tribunal are as under:
5. The second dispute which is relevant only to the appeal filed by the assessee is
regarding the allowability of deduction u/s 10B in respect of interest income. The
assessee is a 100% Export Oriented Unit (EOU) registered under Software Technology
Park Scheme for the development and export of computer software. The assessee had
earned interest income of Rs. 2,89,29,208/- and had also claimed deduction u/s 10B in
respect of interest income. The assessee had submitted that the interest income was
derived from the business activity of the eligible unit and that it had consistently offered
such income as Profit and gains of business and profession. The AO, however, did not
accept the contentions raised. It was observed by him that deduction u/s 10B was
allowable in respect of profit and gains derived from a 100% export oriented undertaking
from the export of article or things or computer software. But in this case interest income
had not been derived from export of article or things or computer software. The AO
placed reliance on the judgment of Hon'ble Supreme Court in case of Pandian Chemicals
Ltd ( 262 ITR 278). Accordingly the AO assessed the income as income from other
8 ITA NO.322& 70/MUM/2014 (A.Y.2008-09)
C.O.NO.27/MUM/2014
sources and denied the claim of deduction u/s 10B. The assessee also made an
alternative claim that only the net interest income after excluding the expenses incurred
for the purpose of earning interest income should be excluded while computing the
deduction u/s 10B. The AO however, did not accept the claim following the judgment of
Hon'ble High Court of Bombay in case of CIT Vs. Asian Star Co. (326 ITR 56) in which it
has been held that the gross receipts and not the net receipts are required to be
excluded while computing the deduction. The AO, therefore, rejected the claim of netting
also and refused the gross interest while computing deduction u/s 10B.
6.In appeal CIT (A) following the decision of Tribunal in the assessee's own case in
assessment year 2006-07 in ITA No. 4316/Mum/2009 held that the assessee was not
entitled to deduction u/s 10B in respect of interest income. CIT (A) also rejected the claim
of the assessee of netting of interest against the interest paid of Rs. 1,28,80,668/-.
Aggrieved by the decision of CIT (A), the assessee is in appeal before Tribunal in which
the issue of allowability of deduction u/s 10B in respect of interest income, netting of
interest income and nature of interest income has been disputed.
7.We have heard both the parties, perused the records and considered matter carefully.
In so far as allowability of deduction u/s 10B in respect of interest income is concerned,
the learned AR for the assessee fairly conceded that the issue was decided by the
Tribunal in assessee's own case in assessment year 2006-07 (Supra). Therefore,
following the decision of Tribunal in assessee's own case in the year 2006-07 (Supra),
we confirm the order of CIT (A) denying the claim of deduction u/s 10B in respect of
interest income.
Accordingly after hearing both the parties, respectfully following the aforementioned
decision in assessee's own case we dismiss this ground.
4. Ground No.II in assessee's appeal is regarding assessability of the
aforementioned interest under the head "income from other sources". According to
assessee the interest earned by it should be assessed under the head business. As
against that it is the claim of the Department that the interest is assessable under
the head "income from other sources". This issue is also stated to be covered by the
aforementioned decision of the Tribunal in assessee's own case, wherein it has been
held that interest income has rightly been assessed under the head income from
other sources. However, Tribunal has directed the AO to allow the expenses
incurred for earning interest income and reference can be made to the following
observations of the Tribunal.
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7.1 As regards the netting of income the AO had denied the claim of netting following
the judgment of Hon'ble High Court of Bombay in case of CIT (A) Vs. Asian Star Co.( 326
ITR 56) in which it has been held that while computing deduction, the gross receipts
and not the net receipts are required to be taken into account. However, the said
decision of High Court has not been held by the Hon'ble Supreme Court in case of
Associated Capsules Ltd. (343 ITR 89) in which it has been held that the net receipts are
required to be adopted. The assessee has also raised dispute about the nature of
interest income which it had not declared as business income and which has been
assessed by AO as income from other sources. We find, from perusal of para 5 of the
order of tribunal in assessment year 2006-07 (Supra) in which the assessee itself
submitted that the interest had been earned from surplus funds generated which had
been deposited in sort term deposits with banks. Therefore, since the interest had been
earned from the surplus funds, in our view, the AO assessing the interest income as
income from other sources is justified. However, while computing the interest income as
income from other sources all expenses incurred for earning of interest income have to
be deducted. This aspect has not been examined either by the AO or by the CIT (A). it is
requested to be examined if any borrowed funds have been used for making the fixed
deposits. Therefore, netting of interest income is restored to AO for fresh decision after
allowing opportunity of hearing to the assessee.
4.1 Accordingly, after hearing both the parties, respectfully following the
aforementioned decision of Tribunal we decide this issue in similar manner and this
ground is considered to be partly allowed for statistical purposes in the manner
aforesaid.
5. Apropos Ground No.III of assessee's appeal, this ground is common with the
sole issue raised by the Revenue in its appeal, which is determination of the Arms
Length Price based on LIBOR. This issue is also stated to be covered by the
aforementioned decision of the Tribunal in assessee's own case and reference was
made to the following observations:
2. We first take up the dispute relating to TP adjustment to which both the parties
are in appeal. The Assessing Officer during the assessment proceedings noted that the
assessee had advanced loan to the overseas subsidiary located in the U.S. on which
interest had been charged at the rate of 7.5% per annum. Since, there was an
international transaction with AE, the AO referred the issue of TP adjustment to the TPO.
The TPO, asked the assessee to submit the relevant materials including TP study for
making transfer pricing adjustment. The assessee stated that the associate enterprise
(AE) had not borrowed from any party including banks and, therefore, no internal
comparables were available. Since, the AE was situated in the U.S the assessee applied
the U.S. Federal rate for bench marking the transaction. It was pointed out that the U.S.
Federal interest rate in May 2006 when the assessee had given loan was 5% per
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annum. The assessee also pointed out that considering the size of business and
credibility of the AE the loans were available at mark up of 200 to 250 basis point over
the bench mark federal rate which translated into interest rate of 7 to 7.5% per annum.
Therefore, it was submitted that applying CUP method which was most appropriate in
the situation, the interest borrowed by the assessee at the rate of 7.5% per annum was
at arms length. The TPO, however, did not accept the contentions raised. It was
observed by him that under the CUP method the interest charged from unrelated party in
similar situation would be the arms length interest and, therefore the issue was the
interest set at which the assessee would have advanced money to independent 3rd party
in India by lending such surplus money. The TPO noted that the assessee had charged
interest at the rate of 15 to 18% from other parties within India and, therefore, the
assessee would have earned more interest had it not advanced money to the subsidiary
but to an independent 3rd party. TPO, therefore, held that the average rate of interest
charged from the other parties i.e. 16.5% would be the arm's length interest rate in this
case and accordingly made adjustment of Rs. 26,61,267/-. The AO following the order
of TPO made an addition of Rs. 26,61,267/- to the total income of the assessee in the
assessment order passed u/s 143 dated 17.1.2011
2.1 The assessee disputed the decision of AO/TPO and submitted before CIT(A) that
in the U.S. market where the AE was situated rate of interest on borrowings was
around 2 to 3%. The assessee charged 200 basis point above the LIBOR rate i.e. @
7.5%. Therefore, the AE had paid more interest to the assessee company which had
been taxed in India. It was also argued that the TPO could not make adjustment on the
basis of notional interest. CIT (A) after considering the submissions of the assessee,
observed that rate of interest adopted by AO related to the domestic borrowings
whereas loan given by the assessee was foreign currency loan. He, therefore, held that
interest rate and all-in-cost ceiling prescribed by RBI to External Commercial Borrowings
(ECB) would be more relevant in this case. He referred to the circular no. 60 dated
31.3.2004 and circular no. 5 dated 1.8.2005 of RBI as per which all-in-cost ceiling over
six months LIBOR rate was 200 basis point in respect of borrowings between 3 to 5
years and 350 basis point in respect of borrowings for more than 5 years. CIT (A)
observed that the loan to the AE was a long term loan and, therefore, held that the
appropriate rate in this case which would be at arms length should be LIBOR rate plus
350 basis point. CIT (A) accordingly directed the AO/TPO to work out the TP adjustment
in respect of interest income adopting the rate of interest at LIBOR + 350 basis point.
Aggrieved by the decision of CIT (A) both the parties are in appeal. Revenue is aggrieved
with the order of CIT (A) allowing relief to the assessee whereas the assessee has
disputed the confirmation of part of the adjustment made by AO.
3. Before us, the learned AR for the assessee submitted that since the loan given by
the assessee was a foreign currency loan to the subsidiary located in USA, the domestic
prime lending rate would have no applicability and that international rate being the
LIBOR rate would be appropriate in this case. Reliance for the said proposition was
placed on the decision of Chennai bench of Tribunal in case of Shiva Industries &
Holdings Ltd. Vs. ACIT (54 SOT 49). It was also pointed out that same view had been
taken by the Delhi bench of Tribunal in case of Cotton Naturals (I) Pvt. Ltd. Vs. DCIT in
5855/Del/2012 in which the Tribunal accepted the plea of the assessee that LIBOR rate
was the most suitable bench mark for judging the arm's length price of interest. The
learned CIT (DR) on the other hand referred to the decision of Tribunal in case of Aurion
Pro. Solutions Ltd. Vs. ACIT in ITA no. 7892/M/2011 in which the Tribunal in para 8.11
observed that the interest earned by the assessee by advancing the said amount to
11 ITA NO.322& 70/MUM/2014 (A.Y.2008-09)
C.O.NO.27/MUM/2014
unrelated parties would be the arm's length interest. In relation to the advances given to
the AE the Tribunal observed that arm's length interest rate in such a case would be the
interest rate on FD with the banks for a term equivalent to the term for which the loans
were given to the AE. The learned AR for the assessee in the reply pointed out that the
Tribunal in case of Aurion Pro Solutions. Ltd. Vs. ACIT (Supra) had finally in para 8.13
followed the view taken by the other bench of Tribunal that LIBOR rate was most
suitable for bench marking the interest on loans to the AE.
4. We have perused the records and considered the rival contentions carefully. The
dispute is regarding transfer pricing adjustment made by the AO on account of funds
advanced by the assessee to the AE located in U.S. at the rate of 7.5% which was 250
basis points above the LIBOR (London Inter Bank Offer Rate). The assessee followed the
CUP method for accounting the TP adjustment which has been accepted by the AO
/TPO. The assessee had not given foreign currency loan to any other 3rd party in the
U.S. The assessee had, however, given loans to the domestic parties at interest rate
varying from 15% to 18%. The AO /TPO have treated average rate of interest at which
the company had advanced to the domestic independent parties for bench marking the
international transaction and accordingly adopted the interest rate of 16.5% for making
the TP adjustment. There are however, several decisions of Tribunal in which it has been
held that in case of foreign currency loans, the domestic prime lending rate would have
no application and that the international rate fixed i.e. LIBOR would be relevant.
Though, the Tribunal in case of Aurion Pro. Solutions. Ltd. Vs. ACIT (Supra) had
expressed the opinion that for the purpose of computation of arm's length interest rates,
the interest on FD with the domestic bank for a term equivalent to the term for which the
loans were given to the AE would be relevant. But ultimately the Tribunal followed the
decision of the other coordinate benches to accept the LIBOR for bench marking interest
on loans to the AE's. We therefore, following these decisions hold that the LIBOR has to
be accepted as the basic rate for bench marking the interest to the AE's. The assessee
has adopted the interest rate of 250 basis point above the LIBOR for making the TP
adjustment. CIT (A) has followed the RBI circular as per which all-in-cost ceiling of 350
basis point over the LIBOR has been prescribed in respect of loans of maturity period for
more than 5 years. CIT (A), has therefore, held that the arms length interest rate would
be at LIBOR + 350 basis point. We however note that 350 basis point in the ceiling
provided in the RBI circular. The ITAT in the case of Aurion Pro Solutions Pvt. Ltd.
(Supra) in the same year had upheld the rate of LIBOR plus 200 basis point. But loans
in that case had been to AE's located in USA, Singapore and Bahrain. Considering the
facts of the case it will be appropriate to adopt the rate of "LIBOR + 300 basis point". We
order accordingly.
5.1 After hearing both the parties, we find that Ld. CIT(A) has just referred and
followed the aforementioned decision of the Tribunal which has already been
reproduced above. In this view of the situation, it is found that the issue has been
decided by Ld. CIT(A) in accordance with the order of the Tribunal in assessee's own
case for immediate preceding assessment year. Therefore, respectfully following the
aforementioned decision of Tribunal, we decline to interfere in the findings recorded
12 ITA NO.322& 70/MUM/2014 (A.Y.2008-09)
C.O.NO.27/MUM/2014
by Ld. CIT(A) and this ground of the Revenue as well as assessee are dismissed. It
may also be mentioned here that the decision referred to in the grounds of appeal
filed by the Revenue was duly considered by the Tribunal in its earlier order.
6. Apropos Ground No.IV of assessee's appeal, it was submitted by Ld. AR that
AO may be directed to give appropriate relief as per the first proviso to section 92C(2)
in case the recomputed adjustment falls within the safe harbour. In this view of the
situation after hearing both the parties, we direct the AO to consider this relief to the
assessee as per law after recomputing the TP Adjustment in accordance with
decision of Ld. CIT(A), which has been confirmed in respect of Ground No.III. We
direct accordingly. This ground is considered to be allowed for statistical purposes in
the manner aforesaid.
7. Apropos Ground No.V, during the course of hearing it was found that this issue
was not raised by the assessee before Ld. CIT(A). The facts relating to this ground as
submitted by Ld. AR are that the assessee had made a donation of Rs.10.00 lacs to
Gian Sagar Educational Charitable Trust and a sum of Rs.21,000/- to Shri Vedmata
Gayatri Trust and claimed deduction under section 80G of the Act of a sum of
Rs.25,525/-, which was allowed by the AO in the assessment order. The assessee
did not raise any issue regarding granting of deduction under section 80G before Ld.
CIT(A). However, a ground has been taken before us claiming that the assessee is
eligible for grant of deduction to the extent of 50% of the donation made i.e. a sum of
Rs.5,10,500/-. It was the case of Ld. AR that since deduction under section 10B(4)
has been reduced and TP Adjustment is made, the assessable income of the assessee
has been increased and correspondingly deduction under section 80G should also be
increased as the assessee is eligible for deduction under section 80G to the extent of
10% of the gross total income.
7.1 On this issue we have heard both the parties. This ground does not arise out
of the order of Ld.CIT(A) . Moreover, AO has not refused to grant deduction to the
assessee. The grievance of the assessee is only with regard to quantum of deduction.
13 ITA NO.322& 70/MUM/2014 (A.Y.2008-09)
C.O.NO.27/MUM/2014
For such relief , unless an additional ground is raised before us, remedy lies
somewhere else and not in this appeal. The assessee, if so advised, may file an
application before AO for rectification to get an enhanced benefit of deduction under
section 80G. However, since this ground does not arise out of order of Ld. CIT(A), we
decline to entertain this ground and this ground is dismissed.
8. Apropos Ground No.VI of assessee's appeal, it was submitted by Ld. AR that
the same is consequential and AO may be directed to recompute the interest under
section 234B and 234C of the Act after giving effect to the order of the Tribunal.
Accordingly, we direct the AO to recompute interest under section 234B & 234C of
the Act after giving effect to this order of the Tribunal. This ground is considered to
be partly allowed for statistical purposes in the manner aforesaid.
9. So far as it relates to Cross Objections filed by the assessee, it was submitted
by Ld. AR that if Ground No.III of the assessee's appeal is decided according to the
earlier order of the Tribunal which has been followed by Ld. CIT(A), then the Cross
Objections filed by the assessee will become infructuious. Since we have upheld the
order passed by Ld. CIT(A) on Ground No.III of assessee's appeal, in view of
submissions of Ld. AR, the Cross Objections filed by the assessee has come become
infructuous, accordingly dismissed.
10. In the result, the appeal filed by the assessee is partly allowed and
Department appeal as well as Cross Objections filed by the assessee are dismissed.
Order pronounced in the open court on 03/09/2014
Û 03/09/2014
Sd/- Sd/-
( /SANJAY ARORA ) (.. / I.P. BANSAL)
/ ACCOUNTANT MEMBER Û / JUDICIAL MEMBER
Mumbai; Dated 03/09/2014
14 ITA NO.322& 70/MUM/2014 (A.Y.2008-09)
C.O.NO.27/MUM/2014
/Copy of the Order forwarded to :
1. / The Appellant
2. × / The Respondent.
3. () / The CIT(A)-
4. / CIT
5. , , / DR, ITAT,
Mumbai
6. [ / Guard file.
/ BY ORDER,
× //True Copy//
/ (Dy./Asstt. Registrar)
, / ITAT, Mumbai
.../Vm, Sr. PS
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