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TMI Blog2021 (12) TMI 1167X X X X Extracts X X X X X X X X Extracts X X X X ..... haracterizing the same to be external commercial borrowing ("ECB"); (iii) Disallowance of Rs. 7,37,96,498/- made under Section 14A of the Act; (iv) Disallowance of Rs. 14,32,50,701/- made under Section 40(a) of the Act; and (v) Recharacterizing the suo moto disallowance of Rs. 5,42,35,783/- made by the assessee under Section 40(a) of the Act as a disallowance under Section 37 of the Act." 3. Brief facts of the case are as follows: The assessee is a company, engaged in the manufacture and supply of industrial gas. The assessee is a subsidiary of Prazair Pacific Limited, Mauritius. During the relevant assessment year, the assessee entered into certain international transactions with its Associated Enterprises (AEs). Two of the international transactions the assessee entered with its AEs were payment of royalty and payment of interest on Compulsory Convertible Debentures (CCDs). The assessee in its Transfer Pricing (TP) study, had aggregated the transaction of payment of royalty with certain other transactions and benchmarked on application of Transactional Net Margin Method (TNMM). The assessee concluded the international transaction of payment of royalty at 4% as being at ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ength (for both the assessment years 2009-2010 and 2010-2011). The copies of the order of the Tribunal for assessment years 2009-2010 and 2010-2011 and the orders of the TPO in giving effect to the Tribunal's order are placed on record. 7.3 The learned Departmental Representative was duly heard. 7.4 We have heard rival submissions and perused the material on record. The Tribunal in assessee's own case for assessment year 2009-2010 in IT(TP)A No.315/Bang/2014 (order dated 31.03.2017) and for assessment year 2010-2011 in IT(TP)A No.361/Bang/2015 (order dated 04.06.2018) had restored the issue of determination of ALP for payment of royalty to the files of the TPO. The TPO, pursuant to the Tribunal's order, passed orders accepting the payment of royalty at 4% to be at arm's length. The relevant portion of the TPO's order for assessment year 2009-2010 reads as follows:- "3. In view of above direction of the ITAT, the assessee was asked to submit the details with respect of all comparables vide letter dated 19.06.2017. In response of the same the submission was filed by the assessee on 11.06.2017 which have been considered. As per submission, assessee has stated that out of the tot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the transaction of payment of interest by applying CUP method. Using the CCD benchmarking study, the assessee selected two companies as comparables and since the arithmetical mean of interest paid by the two companies stood at 9.5%, the assessee concluded the international transaction of payment of interest at 9% to be at arm's length. 8.1 The TPO treated the CCDs as External Commercial Borrowings (ECB) and benchmarked the interest rate paid against LIBOR rate of 4.13% (being LIBOR + 350 basis points). (Refer page 25 to 29 of the TPO's order). 8.2 Aggrieved, the assessee filed objections before the DRP. The DRP rejected the assessee's objections and upheld the TPO's order (refer pages 3 and 4 of the DRP's directions). 8.3 Aggrieved, the assessee has raised this issue before the Tribunal. It is submitted that the TPO and DRP grossly erred in treating the CCDs as ECBs and benchmarking the interest rate against LIBOR rate. It was submitted that CCDs being a hybrid instrument, cannot be treated as an ECB/loan. Reliance in this regard is placed on the order of the Hyderabad Bench of the Tribunal in the case of ADAMA India (P.) Ltd. v. DCIT ([2017] 78 taxmann.com 75 (Hyderabad- Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated the issuance of CCDs as a loan, by treating it as an external commercial borrowing, ignoring the fact that loan is a debt, whereas CCD is hybrid instrument in nature basically categorised as equity in nature. It was accepted by the Hon'ble Supreme Court in the case of Sahara India Real Estate Corporation Limited and Sahara Housing Investment Corporation Limited & Ors. Vs. Securities and Exchange Board of India & Anr. in Civil Appeal No. 9813 of 2011 dt. 31-08-2012 (supra) while assigning the jurisdiction to SEBI as an 'equity instrument'. Further, the policy of Govt. of India and also RBI effective from 01- 04-2010 also indicate that issuance of CCD is part of FDI being quasi-equity in nature and considering the same as a loan would be completely against regulations laid by DIPB, RBI and FEMA. It is to be reiterated that issuance of CCDs was denominated in Indian Rupees and not foreign currency. Therefore, TPO has erred in considering LIBOR as benchmark rate which is in complete contradiction to the principles on the issue. The following judicial precedents supports that the rate interest has to be considered in the currency in which loan has originated: i. India Debt Ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to whether the level of interest rates in the lender's State or that in the borrower's is decisive, therefore, primarily depends on the currency agreed upon (BFH BSt.B 1. II 725 (1994), re 1 § AStG). A differentiation between debtclaims or debts in national currency and those in foreign currency is normally no use, because, for instance, a US $ loan advanced by a US lender is to him a debt-claim in national currency whereas to a German borrower it is a foreign currency debt (the situation being different, however, when an agreement in a third currency is involved). Moreover, a difference in interest levels frequently reflects no more than different expectations in regard to rates of exchange, rates of inflation and other aspects. Hence, the choice of one particular currency can be just as reasonable as that of another, despite different levels of interest rates. An economic criterion for one party may be that it wants, if possible, to avoid exchange risks (for example, by matching the currency of the loan with that of the funds anticipated to be available for debt service), such as taking out a US $ loan if the proceeds in US $ are expected to become available (say ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liance on the judgment of the Hon'ble Delhi High Court in the case of CIT v. Cotton Naturals (I) Pvt. Ltd. (supra), we hold that the TP study of the assessee to justify the interest rate by arriving at average rupee cost and comparing the same with SBI prime lending rate is correct. It is ordered accordingly. 8.6.4 Hence, ground 4 is allowed. Disallowance u/s 14A of the Act (Ground 5.4) (Corporate Tax Issue) 9. The Assessing Officer made a disallowance u/s 14A of the Act of Rs. 7,37,96,498 computed as per Rules 8D(ii) and (iii) of the Income-tax Rules, 1962. The DRP rejected the objections of the Appellant and affirmed the disallowance. 9.1 Aggrieved, the assessee has raised this issue before the ITAT. The learned AR submitted that the assessee did not earn any exempt income during the relevant assessment year. Therefore, it was submitted that no disallowance can be made u/s 14A of the Act. The learned AR relied on the judgment of the Hon'ble Karnataka High Court in the case of CIT & Anr. v. Quest Global Engineering Sources Pvt. Ltd. (ITA No.133/2015, judgment dated 15.02.2021) and the judgment of the Hon'ble Bombay High Court in the case of India Debt Management (P) Ltd. repor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, the provisions of Section 14A of the Act do not apply to the fact situation of the case. Therefore, it has become necessary for us to clarify the view taken in the two decisions viz., KINGFISHER FINVEST INDIA LTD. AND MIS NOVEL SOFTWARE INDIA (P) LTD. supra. At this stage, we may refer to Paragraph 40 of the decision of the Supreme Court in MAXOPP supra, the relevant extract of which reads as under: It is to be kept in mind that in those cases where shares are held as 'stock-in-trade', it becomes a business activity of the assessee to the deal in those shares as a business proposition. Whether dividend is earned or not becomes immaterial. In fact, it would be a quirk of fate that when the investee company declared dividend, those shares are held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profits. The situation here is therefore, different from the case like Maxopp Investment Ltd. where the assessee would continue to hold those shares as it wants to retain control over the investee company. In that case, whenever dividend is declared by the investee company that would necessarily be earned by the assessee and the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not a binding precedent. In view of preceding analysis, the second substantial question of law is also answered against the revenue and in favour of the assessee. In the result, we do not find any merit in this appeal, the same fails and is hereby dismissed." 9.3 The Hon'ble Bombay High Court in the case of India Debt Management (P.) Ltd. (supra) has held that when the assessee does not receive any dividend income, no disallowance can be made u/s 14A of the Act. The relevant finding of the Hon'ble High Court of Bombay, reads as follows:- "7. Regarding question (b) -: The issue is no longer res-intigra. The facts are that the assessee had not earned any exempt, income during the year under consideration. As held earlier Delhi High Court which judgment is also followed repeatedly by our Court, in case of Chemvinvest Ltd. v. CIT [2015] 61 taxmann.com 1181234 Taxman 761/375 ITR 33 (Delhi), in such a case disallowance of expenditure under section 14A of the Act would not be permissible. The decision of Delhi High Court was carried in the appeal by the revenue. The SLP has been dismissed by the Supreme Court." 9.4 In the light of the aforesaid judicial pronouncements, the disal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion was made in books or this can also be due to excessive estimation of likely expenses when provision was made. In the present case the audit report shows that the TDS has been short deducted in relation to certain payments to contractors / sub-contractors / professionals / rent / interest etc. So these are actual expenses unless until the genuineness of transaction itself is doubted. Since the AO has not examined the issue by following this approach, he is directed to allow these expenses in the year under consideration after verifying that the ta at source has actually been deducted on such payments paid to the Government and since the expense is being claimed in the year under consideration, the AO can also verify the genuineness of transaction and the payment. Further AO is free to inform the concerned TDS authorities regarding non deduction of Tax at source by the assessee at the relevant time of making provision in view of provisions of section 194C(2) / 194I explanation (ii) / 194J explanation (c)/ explanation to sec.194A etc. so that appropriate action can be taken by such authorities for such default. The objection A of the assessee is decided in above terms." 10.6 The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vious year, namely, assessment year 2010-2011, the assessee ought to have taken correctional steps for the assessment concluded for assessment year 2010-2011 and not for the relevant assessment year. There is no statutory provision which provide for claiming amount wrongly shown as income in one year as deduction / expenditure in any subsequent year (unlike first proviso to section 40(a)(ia) of the Act, whereby the assessee is permitted to claim deduction of the expenditure in the year in which the tax has been deducted on such expenditure and remitted to the Government account). Therefore, we affirm the view taken by the DRP. 11.5 Hence, ground 6.3 is rejected. Disallowance of expenditure u/s 40(a)(ia) of the Act of Rs. 5,42,35,783 (ground 7) 12. The assessee suo moto had disallowed a sum of Rs. 5,42,35,783 for non-deduction of tax at source. (refer page 2139 of the paper book Vol.III). The Assessing Officer recharacterized the same as a disallowance u/s 37 of the Act. The DRP held that the objections of the ground do not arise out of variation in the returned income and rejected the objections of the assessee. (refer page 5 of the DRP's order). 12.1 Aggrieved, the assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X
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