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TMI Blog2015 (10) TMI 2376X X X X Extracts X X X X X X X X Extracts X X X X ..... 1)(iia) on some of the items of fixed assets (plant and machinery) amounting to Rs.3,57,606. 3. The learned AO erred in law and on facts and Hon'ble DRP erred in law and on facts in sustaining AO's view in holding that delayed payments of PF I ESIC I MLWF amounting to Rs.5,97,354 should be disallowed as a deduction considering provisions of section 36(1)(va). 4. The appellant craves leaves to add, modify, alter, amend, or withdraw all or any of the Grounds of Appeal herein and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing. 3. The issue raised vide ground of appeal No.1 is against the adjustment made on account of arm's length price of interest receivable transaction from the Netherland based associate enterprise company. 4. Briefly, in the facts of the present case, the assessee was engaged in the business of manufacturing of polymer engineering and electrical goods and wind power generation. During the year under consideration, the assessee had entered into international transactions with its associate enterprises i.e. Varroc European Holding BV, City Bank International PLC Euro Plaza Hoorgorr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpute the arm's length price of international transaction. The relevant findings of the Tribunal are as under:- "3. The brief facts of the case are that, the assessee company was engaged in the business of manufacture of polymer engineering and electrical goods and wind power generation. During the year under consideration, the assessee had proposed to take over a running auto component business in Europe. The said business was carried on through a Italian and Poland company. The cost of acquisition of the said European business was to be around Euro 64.95 million and the loans from the overseas companies were to the tune of Euro 46 million and the contribution of the assessee was to the tune of Euro 18.95 million. The assessee company applied for proper prior approvals under the FEMA and made the application to the RBI for acquisition in Europe. The assessee raised a loan from Citi Bank during the year under consideration to the tune of Euro 11.12 millions. The claim of the assessee was that the loan was raised from Citi Bank for part financing the European business acquisition and the said loan was raised @ interest LIBOR + 1.5% p.a. which ranges between 2 - 2.5% and the bal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e worked out. Since the assessee failed to furnish any reply to the said show cause notice, the TPO proceeded to work out the addition on the basis of the material available on record. The TPO noted that during the year under consideration, interest of Rs. 2.91 crores had accrued to the assessee on loan granted to the AE i.e. on loan of Euro 10 million to Varroc European Holding BV, Netherlands, Euro 1,00,00,000 and repayment of loan of Euro 5,00,000 hence effectively loan during the year amounted to Euro 96,30,000 which was equivalent to Rs. 55,21,57,400/-. The TPO further noted that the assessee company decided that the interest was charged @ 4.75% p.a. However, the rate prevailing as per six months LIBOR + 1.5% for the year ending 31.03.2008 was 6.79%. The TPO tabulated the transactions in respect of loans granted and interest charged under para 8 at page 3 of the order under section 92CA(3) of the Act and proposed an adjustment of Rs. 4,41,74,661/-. 6. The assessee had benchmarked its international transaction taking interest rate charged @ international rate of the disbursing bank i.e. Citi Bank. This benchmarking was adopted at foreign currency Citi Bank rates. The TPO obse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Length Price. As per TPO, the loan has been given to company which has no financial legs to run on and further, on its own it could not have arranged for the funds it required that the loan has been given by the principal to its subsidiary. In the given financial health of the subsidiary and for assuming the risk pertaining to loan in foreign currency, risks relating to foreign exchange fluctuation, the rate of interest charged should adequately compensate the assessee. Under the circumstances and in Arm's Length situation, the rate charged by the assessee should have been at least at BPLR in India, if not higher, was the view of TPO. The TPO in view thereof, held as under:- "17. In view of the facts of the case, discussion as above, the Arm's Length Price computed by the assessee in respect of the International Transaction relating to provision of interest is not found to be acceptable. In the given facts and in third party situation, the assessee would never lend money to an unrelated entity end in any such case at the rate not less than BPLR. In normal circumstances if such advance has to be given to any unrelated entity, the rate of interest chargeable would be signific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest. The assessee claims that substantive part of the deal was in capital investment in wholly owned company, in turn acquisition of company in Italy. The loan received from Citi Bank was utilized for two purposes i.e. acquisition of share capital and also for international funding. The learned Authorized Representative for the assessee further pointed out that it had borrowed on LIBOR + interest rates i.e. the Japanese base LIBOR+ rates which was lower than US LIBOR+ rates and advanced the same by charging LIBOR + rates. The charging of the interest on loans in assessment years 2008-09 and 2009- 10 was @ 4.75%. However, in assessment year 2010-11, the whole loan was converted into share application money. Further plea of the assessee was that it applied the internal CUP method of borrowing at international rate. So, there was no merit in applying domestic rates to compute the Arm's Length Price adjustment. The learned Authorized Representative for the assessee further pointed out that the lending was made at LIBOR+ rates. Further, the reliance was placed on the following decisions by the learned Authorized Representative for the assessee. a. Siva Industries & Holdings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 2,91,82,060/- had accrued as interest on loan granted to its associated enterprises. The assessee had granted loan to M/s. Varroc European Holding BV Netherlands Euro 1,00,00,000 and repayment of loan of Euro 5,00,000, hence during the year, the effective loan amounted to Euro 96,30,000 which was equivalent to Rs. 55,21,57,400/-. The assessee had charged interest @ 4.75% per annum. As per the TPO, the rate prevailing as per LIBOR +, for the year ending 31.03.2008 was 6.79%. The TPO tabulated the transactions of granting of loan and the interest charged by the assessee and computed the proposed adjustment as under:- (Amt. in Rs.) Description Varroc European Holding BV Netherlands [A] Loan advanced / Balance of loan at the year ending 31.03.2008 Rs.59.43 Crs. (figures as per the financials) [B] Base charge adopted by the assessee LIBOR [C] Base charge adopted by the assessee to benchmark the transaction However, rate charged by the assessee = 4.75% [D] Bank Prime lending rate (BPLR) of SBI as on 31.03.2008 12.25% [E] RATE CHARGED BY THE ASSESSEE 4.75% [F] Interest charged by the assessee Rs.2,86,27,089 [G] The rate prevailing as per 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s what has to be seen is the comparison between related transactions i.e. where the assessee has advanced money to its associated enterprises and charged interest then the said transaction is to be compared with a transaction as to what rate the assessee would have charged, if it had extended the loan to the third party in foreign country. Once there is a transaction between the assessee and its associated enterprises in foreign currency, then the transaction would have to be looked upon by applying the commercial principles with regard to the international transactions. In that case, the international rates fixed being LIBOR+ rates would have an application and the domestic prime lending rates would not be applicable. The assessee has further explained that it had raised the loan from Citi Bank on international rates for the purpose of investment in the share application money of its associated enterprises, which in turn was partly converted from capital into loan. Where the assessee had a comparable of borrowing loan on international rates and advancing to its associated enterprises, then the said comparable was to be applied for benchmarking the transaction of advancing the loan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee. In the circumstances, the addition made by the Assessing Officer on this count was deleted." 17. The Mumbai Bench of the Tribunal in DCIT Vs. Tech Mahindra Ltd. (2011) 12 taxmann.com 132 (Mum.) held that where there is a choice between the interest rate of currency other than the currency in which transaction had taken place and the interest rate in respect of the currency in which transaction has taken place, the latter should be adopted. Where the transaction is between the assessee and its associated enterprises in foreign currency and the transaction is international transaction, then the transaction would have to be looked upon by applying commercial principles in regard to international transactions. 18. Similar principle has been laid down by the Mumbai Bench of the Tribunal in Hinduja Global Solutions Ltd. Vs. ACIT (2013) 35 taxmann.com 348 (Mumbai - Trib.). 19. In the entirety of the above facts and circumstances, we hold that where the assessee had entered into a transaction with its associated enterprises in foreign currency, and the transactions were international transactions, then the same had to be looked into by applying commercial principle in regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest receivable from associate enterprises, but in the year under appeal, there is no such issue. Accordingly, we allow the ground of appeal No.1 raised by the assessee as indicated above. 10. The issue in ground of appeal No.2 raised before is in relation to the disallowance of additional depreciation under section 32(1)(iia) of the Act on items of fixed assets. 11. The learned Authorized Representative for the assessee at the outset pointed out that the issue in the present appeal is identical to the issue before the Tribunal in preceding year, wherein additional depreciation under section 32(1)(iia) of the Act was claimed on list of items and the Tribunal had directed that the said additional depreciation is allowable only on trolley and industrial fans. 12. The learned Departmental Representative for the Revenue placed reliance on the orders of authorities below. 13. We have heard the rival contentions and perused the record. The issue arising in the present appeal is with respect to the claim of additional depreciation on various assets, which are tabulated under para 4 at page 2 of the assessment order passed under section 143(3) r.w.s. 144C of the Act. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... goods and cannot form part of the Plant & Machinery. We are of the view that the Racks cannot be considered as part of block of Plant & Machinery and no additional depreciation is allowable on the same. Further, depreciation @ 10% is to be allowed on such Racks being Furniture & Fixtures. 27. The next item is Trolley which as per the Assessing Officer is part of the Furniture & Fixtures as the same is used for transferring material and goods from one place to another. The value of the Trolley is Rs. 16.01 lakhs and Rs. 20.78 lakhs. Keeping in mind the nature of asset and functional test, we find no merit in the order of Assessing Officer in this regard and direct the Assessing Officer to consider the same within block of Plant & Machinery and allow the depreciation and additional depreciation on the same. 28. The next items were Air-conditioner, TV Music System and Industrial Fan. The Air-conditioner is Plant & Machinery on which the depreciation at higher rate is allowable. However, no additional depreciation on the same is allowable since the same cannot part take the machinery used for manufacturing activities. Further, TV Music System is an electronic item on which higher r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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