2017 (5) TMI 1637 - AT - Income Tax

Determining the arms length rate of interest in respect of transactions of loan in foreign currency between the associated enterprises - Held that - As consistently held in several decisions by the tribunal that wherever the transaction of loan between the associated enterprises is in foreign currency then the transaction would have to be looked upon by applying the commercial principles in regard to international transaction. Therefore the domestic prime lending rate would have no applicability and the international rate LIBOR would come into play. It has therefore been held that LIBOR rate has to be considered while determining the arms length rate of interest in respect of transactions of loan in foreign currency between the associated enterprises. This view has also been accepted by the Hon ble Delhi High Court in the case of CIT vs Cotton Naturals (I) Ltd. 2015 (3) TMI 1031 - DELHI HIGH COURT Composite income - Income from growing manufacturing and sale of tea - comprises agricultural income to the extent of growing tea which is not chargeable to tax and nonagricultural income to the extent it comprises of income from manufacture and sale of tea which income is chargeable to tax - According to the AO Cess on green leaf was an expenditure which was attributable to the activity of growing of tea and would therefore be not allowable as deduction while computing income from manufacture and sale of tea - Held that - The issue is concluded by the decision of the Hon ble Jurisdictional High Court in the case of CIT vs AFT Industries Ltd. 2004 (7) TMI 81 - CALCUTTA HIGH COURT where the amount paid as cess was held as eligible for deduction in computing the composite income under Rule 8 of I.T. Rules. This issue is therefore decided in favour of the assessee upholding the order of the C.I.T.(A) who has allowed the deduction of payment of cess on green leaves in computing the composite income from tea business of the assessee under rule 8 of the I.T. Rules. Also confirmed by M/S APEEJAY TEA CO. LTD 2015 (8) TMI 1260 - SUPREME COURT - Decided against revenue

Summary

Issues Involved:
1. Adjustment of interest charged to the subsidiary company ZAO Classic Russia.
2. Allowability of cess on green leaf as an expenditure.

Issue-Wise Detailed Analysis:

1. Adjustment of Interest Charged to the Subsidiary Company ZAO Classic Russia:
The core issue was whether the interest rate charged by the assessee on a loan given to its subsidiary, ZAO Classic Russia, adhered to the Arm's Length Price (ALP) as mandated by Section 92 of the Income Tax Act, 1961. The assessee had provided a foreign currency loan at an interest rate of 8% per annum, which was higher than the average LIBOR rate of 4.68%. The Transfer Pricing Officer (TPO) argued that the arms-length rate should be 14.12%, leading to an adjustment of ?40,32,011. However, the CIT(A) deleted this adjustment, referencing multiple tribunal decisions, including the ITAT Chennai's decision in Siva Industries & Holdings Limited, which emphasized that for foreign currency loans, the LIBOR rate should be considered, not the domestic prime lending rate. The tribunal upheld the CIT(A)'s decision, citing consistent legal precedent that the LIBOR rate applies to international transactions between associated enterprises. Thus, ground no.1 raised by the revenue was dismissed.

2. Allowability of Cess on Green Leaf as an Expenditure:
The second issue pertained to whether the cess on green leaf amounting to ?1,44,03,221 was deductible. The AO contended that this cess, being attributable to agricultural activities, was beyond the purview of Central Income Tax. However, the CIT(A) allowed the deduction, following the precedent set by the Hon'ble Calcutta High Court in AFT Industries Ltd. vs CIT, which held that green leaf cess should be deducted before applying Rule 8(1) of the Income Tax Rules, 1962. The tribunal supported the CIT(A)'s decision, noting that the issue was conclusively decided by the jurisdictional High Court and upheld by the Hon'ble Supreme Court in CIT Vs. M/S. Apeejay Tea Co. Ltd. Consequently, ground no.2 raised by the revenue was also dismissed.

Conclusion:
The tribunal dismissed the appeal by the revenue on both grounds, affirming the CIT(A)'s decisions regarding the adjustment of interest on the loan to ZAO Classic Russia and the deductibility of green leaf cess. The judgments were based on established legal precedents and consistent tribunal decisions. The order was pronounced on 12.05.2017.