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TMI Blog2017 (11) TMI 711X X X X Extracts X X X X X X X X Extracts X X X X ..... was earned by the assessee during the year, therefore, no disallowance can be made, for which, reliance was placed upon the decision from Hon'ble jurisdictional High Court in Cheminvest Ltd. vs CIT 378 ITR 33 (Del.). 2.1. So far as ITA No.6607/Del/2016 is concerned, the argument on behalf of the assessee is that the assessee itself made disallowance to the extent of exempt income, therefore, no further disallowance is permissible, for which reliance was placed upon the decision Joint Investments Pvt. Ltd. vs CIT 372 ITR 694 (Del.). In reply, the ld. Sr. DR filed written submission mentioning certain judicial orders, the same is kept on record. 2.2. We have considered the rival submissions and perused the material available on record. We note that the in the case of Metropolitan Exim Chem Ltd. (ITA No.5749/Mum/2014) vide order dated 01/08/2017 made an elaborate discussion on section 14A of the Act and the ratio laid down therein covers the case of the assessee along with other decisions cited before us including Hon'ble jurisdictional High Court in the case of Cheminvest Ltd. vs CIT 378 ITR 33(Del.). Therefore, we are reproducing hereunder the relevant portion from the aforesaid o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Baba Global Ltd. (Supra), therefore, before coming to any conclusion, we are reproducing hereunder the relevant portion of this order for ready reference and analysis:- "These are six appeals filed by the assessee against the action of the learned DRP upholding the order passed by the AO under Section 153A read with section 144C of the Act for assessment years 2006-07 to 2010-11 and under section 143(3) for assessment year 2011-12 consequent to the direction issued by the learned Dispute Resolution Panel. 2. In the appeal filed for assessment years, 2006-07, 2007-08 and 2008-09, besides questioning the validity of assessment framed under section 153A of the Income-tax Act, 1961, the only issue is the addition of amount of the notional interest on foreign currency loan advanced by the assessee company to its wholly owned foreign subsidiaries. Whereas for assessment years 2009-10 to 2011-12, besides the above adjustment on account of the notional interest, the issue also is that of addition under Section 14A of the Income Tax Act. 3. The assessee company is engaged in manufacturing of flavoured chewing tobacco, kiwam, scented elaichi, etc. under the brand name 'BABA' an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he order of the jurisdictional Delhi High Court in the case CIT (Central) - III versus Kabul Chawla [2016] 380 ITR 573 (Del). 10. On the issue of the merit, it was contended by the learned AR that the additions are untenable as the assessee has paid the advances to its subsidiary companies out of EEFC accounts. The EEFC account even otherwise does not earn any interest. The advances given to the subsidiary companies were in the nature of quasi capital and were for business consideration. The main purpose of giving advances to its subsidiary companies was to promote its export business and to have foothold in these foreign countries. 11. In the alternative, it was contended by the learned AR that the rate of interest cannot be that of the Indian Rupees. The money has been advanced in foreign currency and interest rate to be charged has to be the interest rate of such foreign currency. If the money has been advanced in US Dollar it has to be LIBOR. In respect of advances in Euro the interest rate has to be EUR (LIBOR) and in respect of advances given in Swiss Franc the interest rate has to be that of CHF (LIBOR). In support of its contention the learned AR relied upon the judgm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated all the assessments get reopened consequent to the issue of notice under section 153A and as such the AO is entitled to make adjustment to the income as permissible under the law. 16. On the issue of rate of interest it was contended that the rate of interest has to be that of Indian Rupees as assessee would have earned the interest in Indian Rupees had it not advanced the money to its foreign subsidiary. 17. As regards conversion of the loan into share application money in assessment year 2011-12 it was contended that there is no difference between the loan and the share application money and hence interest has to be charged for that year also. 18. On the issue of disallowance under section 14A it was contended that the AO has invoked the provisions of Rule 8D and mere not recording of satisfaction will not make such disallowance untenable in the eye of law. 19. We have considered the rival submissions and perused the order passed by the authorities below. The first issue is addition made by the AO in the assessment years which have not abated consequent to the search i.e. assessment years 2006-07, 2007-08 and 2008-09. As per the facts on record, the search took p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted assessment can be reiterated and the abated assessment or reassessment can be made. The word 'assess' in Section 153 A is relatable to abated proceedings (i.e. those pending on the date of search) and the word 'reassess' to completed assessment proceedings. vi. Insofar as pending assessments are concerned, the jurisdiction to make the original assessment and the assessment under Section 153A merges into one. Only one assessment shall be made separately for each AY on the basis of the findings of the search and any other material existing or brought on the record of the AO. vii. Completed assessments can be interfered with by the AO while making the assessment under Section 153 A only on the basis of some incriminating material unearthed during the course of search or requisition of documents or undisclosed income or property discovered in the course of search which were not produced or not already disclosed or made known in the course of original assessment. Conclusion 38. The present appeals concern AYs, 2002-03, 2005-06 and 2006- 07.On the date of the search the said assessments already stood completed. Since no incriminating material was unearthed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to be evaluated by applying arm's length price. Since it was a loan during the assessment years 2009-10 and 2010-11, the assessee company ought to have computed the arm's length price in respect of such loan advanced to its subsidiary companies. However, as regards the interest rate we are in agreement with the contention of the learned AR that this cannot be the interest rate applicable to Indian Rupees. These advances having been made in the foreign currency, the rate of interest has to be with reference to the interest rate on loans and advances in respect of foreign currency. This issue is covered by the judgment of the jurisdictional Delhi High Court in the case of CIT vs. Cotton Naturals (P) P Ltd. (2015) 276 CTR 0445 (Del) wherein the Hon'ble High Court has been pleased to hold as under:- "39. The question whether the interest rate prevailing in India should be applied, for the lender was an Indian company/assessee, or the lending rate prevalent in the United States should be applied, for the borrower was a resident and an assessee of the said country, in our considered opinion, must be answered by adopting and applying a commonsensical and pragmatic reasoning. We have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come available (say from exports). If an exchange risk were to prove incapable of being avoided (say, by forward rate fixing), the appropriate course would be to attribute it to the economically more powerful party. But, exactly where there is no ‗special relationship', this will frequently not be possible in dealings with such party. Consequently, it will normally not be possible to review and adjust the interest rate to the extent that such rate depends on the currency involved. Moreover, it is questionable whether such an adjustment could be based on Art. 11 (6).For Art. 11(6), at least its wording, allows the authorities to ‗eliminate hypothetically' the special relationships only in regard to the level of interest rates and not in regard to other circumstances, such as the choice of currency. If such other circumstances were to be included in the review, there would be doubts as to where the line should be drawn, i.e., whether an examination should be allowed of the question of whether in the absence of a special relationship (i.e., financial power, strong position in the market, etc., of the foreign corporate group member) the borrowing company might not have comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as held as under:- "47. We find that in the present case the TPO has not disputed that the impugned transactions were in the nature of payments for share application money, and thus, of capital contributions. The TPO has not made any adjustment with regard to the ALP of the capital contribution. He has, however, treated these transactions partly as of an interest free loan, for the period between the dates of payment till the date on which shares were actually allotted, and partly as capital contribution, i.e. after the subscribed shares were allotted by the subsidiaries in which capital contributions were made. No doubt, if these transactions are treated as in the nature of lending or borrowing, the transactions can be subjected to ALP adjustments, and the ALP so computed can be the basis of computing taxable business profits of the assessee, but the core issue before us is whether such a deeming fiction is envisaged under the scheme of the transfer pricing legislation or on the facts of this case. We donot find so. We donot find any provision in law enabling such deeming fiction. In view of the above facts and the judgment of coordinate bench, the AO is directed to verify t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r conclusion, thus, the ratio laid down in the cases mentioned by the ld. Counsel for the assessee, clearly supports the case of the assessee. So far as, the case of Baba Global Ltd. vs DCIT (supra), relied upon by ld. DR is concerned, even in that case in para-26, there is categorical finding that the disallowance cannot exceed the exempt income. The ratio laid down in Joint Investment Pvt. Ltd. vs CIT (2015) 372 ITR 694 (Del.) clearly supports the case of the assessee, thus the case relied upon by ld. DR is of not much help to the Revenue. Thus, the appeal of the assessee is allowed. Finally, the appeal of the assessee is allowed. 2.2. If the observation made in the assessment order, leading to addition made to the total income, conclusion drawn in the impugned order, conclusion drawn in the aforesaid order of the Tribunal dated 21/04/2017, material available on record, assertions made by the ld. respective counsel, if kept in juxtaposition and analyzed, we note that the Hon'ble jurisdictional High Court in the case of Godrej & Boyce Mfg. Co. Ltd. 194 taxman 203 has clearly held that Rule -8D of the Rules is applicable from Assessment Year 2008-09. In the present appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X
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