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2016 (3) TMI 829

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..... We fail to appreciate as to how ld. DRP has drawn the conclusion from the above statement that Indian company is treating this amount as interest. The true nature of transaction cannot alter merely by clubbing the discounting charges under the head ‘financial expenses’. Therefore, this plea raised by ld. CIT(DR) on the basis of observation made by ld. DRP for distinguishing these facts in the current year from earlier years is without any basis. As far as ld. CIT(DR)’s submission regarding non-cooperation of assessee on the basis of observations made by ld. DRP in para 7 are concerned, we find that none of the authorities below have pointed out as to which particular information was missing in the entire trail of transaction. In the submissions filed by assessee it is clearly stated that all the relevant information were furnished before lower revenue authorities. - Decided in favour of assessee - ITA nos. 5260 & 5006/Del/2011 - - - Dated:- 15-3-2016 - SHRI S.V. MEHROTRA : ACCOUNTANT MEMBER AND Ms. SUCHITRA KAMBLE : JUDICIAL MEMBER For The Appellant : Shri Rohan Khare and Shri A Srivastava and Shri D. Chopra Advocates For The Respondent : Shri Anuj Arora CIT(DR) .....

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..... is case, as explained by the assessee, CIPL draws bill of exchange on the buyer. CIPL gets these bills of exchange discounted with CFSA (assessee), which remits the balance amount of bill of exchange (net of discount) to CIPL. On the maturity date the buyer pays the full amount of the bill of exchange to CFSA. As mentioned in the bill of exchange discounting, the pricing of the discounting is based on the Libor plus margin. The transaction from the perspective of the assessee is explained as below: - It purchases the bill of exchange, for which discounting agreement is entered- and this mentions the face value, the date of acceptance of the bill and maturity date. - The discounting agreement also has a mention of the pricing of the product and tenor of the bill. - The discounting agreement has a mention of the face amount, discount amount and the net proceeds payable by the assessee. - On the date of purchase of the bill of exchange, the assessee pays to CIPL the net proceeds after charging the discount on the face value. - On the date of maturity it receives the face value from the buyer/ obligor of the bill. - To summarize the transaction is a simple lending of .....

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..... roached for discounting of bills. (viii) No reason has been given as to why the bills were not discounted by the Indian company in the Indian market from any bank or financial institutions or any other company engaged in similar business. (ix) Where was the money invested by the Indian company after receiving it from the assessee? (x) Who is in possession of original bill landing and other export documents? (xi) What is the basis of information and expertise with Indian company to identify goods without inspection on high seas and negotiate and sell the same? (xii) No document has been submitted correspondence between the Indian International, Geneva. (xiii) No details are furnished as to how the debt has been recovered by the assessee from Cargill International Geneva? (xiv) No copies of final accounts of the assessee have been furnished before the AO or before this Panel to show the treatment of this transaction in their books of accounts. 7.1 In fact, the whole transaction is a colorful device by the assessee company to earn interest from India without payment of taxes. As the assessee cannot simply deposit funds in India to earn h .....

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..... .9.2011 for A.Y. 2008-09 assessing the interest income at ₹ 558,084,042/- taxable @ 15%. 7. Being aggrieved, the assessee is in appeal before us and has taken following grounds of appeal (A.Y. 2003-04):- Based on the facts and circumstances of the case, the Appellant respectfully submits: 1. That the learned Assistant Director of Income Tax, Circle- 1 (1), International Taxation, New Delhi (hereinafter referred to as 'Learned AO') and Hon'ble Dispute Resolution Panel ('the DRP') have erred on the facts and in circumstances of the case and in law in initiating re-assessment proceedings based on mere change of opinion as there were no material facts on record giving rise to any valid reasons to believe that any income has escaped assessment. Accordingly, initiation of the re-assessment proceedings for A Y 2003-04 are bad in law. 2. Without prejudice to above, the Learned AO and Hon'ble DRP have erred in facts and in law in making the addition of discounting charges amounting to ₹ 80,268,762 on the following grounds: 2.1 That on the facts and circumstances of the case and in law, the learned AO erred in characterizing the di .....

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..... e tax was payable by the appellant. 4. The learned AO has erred on the facts and the circumstances of the case and in law by initiating penalty proceedings u/s 271(l)(c) against the appellant for furnishing inaccurate particulars or for failure to disclose true particulars of income. The above grounds are independent and without prejudice to each other. The Appellant craves leave to add, alter, supplement, amend, vary, withdraw or otherwise modify the ground mentioned herein above at or before the time of hearing. 8. At the outset ld. counsel for the assessee submitted that the issue is squarely covered by the Tribunal s consolidated order dated 19.8.2011 in assessee s own case for AYs 2004-05 and 2005-06rendered in ITA nos. 579/Del/2010 and 580/Del/2010 and also by the decision of Tribunal in the case of Cargill TSF Asia Pte Ltd. for A.Ys. 2005-06, 2006-07 and 2007-08 vide ITA nos. 581/Del/2010, ITA no. 3880 3057/Del/2010. He referred to para 7 of the order in assessee s own case, wherein it has been held as under: 6. We have duly considered the rival contentions and gone through the record carefully. In the case of Cargil Clobal Trading India (P) Ltd. .....

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..... utilized portion of any credit sanctioned for being availed of in India and (b) discount on promissory notes and bills of exchange drawn or made in India. Thus where the legislature was conscious of the fact that even the discount of bills of exchange is to be included within the definition of interest, the same was basically so' provided for. However, under the scheme of Income-tax Act the word Interest defined under section 2(28A) does not include the discounting charges on discounting of bills of exchange. Though the circular no. 65 was rendered in relation to deduction of-tax under section 194A, in respect of payment to a resident, the same will be relevant even for the purpose of considering whether the discount should be treated as interest or not. The CBDT has opined that where the supplier of goods makes over the usance bill/hundi to his bank which discounts the same and credits the net amount to the supplier's account straight away without waiting for realization of the bill on due date, the property in the usance bill/ hundi passes on to the bank and the eventual collection on due date is a receipt by the bank on its own behalf and not on behalf of the supplier. .....

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..... s observed as under: 5. We may notice at this stage that the respondent-assessee is in the export business. On the exports made by the assessee to its best buyers outside India, the assessee draws bills of exchange on those buyers located outside India. These bills of exchange are discounted by the assessee from CFSA who on discounting the bills immediately remits the discounted amount to the assessee. Thereafter, it is the obligation/headache of CFSA to realise the amounts from those buyers to whom the goods are exported and bills are drawn by the assessee. It is the said discounted charges which were claimed by the assessee as expenses under section 37(1) of the Act. The discounting facilities offered by CFSA to the assessee after charging its aforesaid discounted commission are not questioned by the Revenue. The only objection was that on this amount remitted by the assessee to CFSA, the assessee was to deduct tax at source (TDS) under section 195 of the Act and since it was not done, invoking the provisions of section 40(a)(i) of the Act, the expenditure was disallowed. 6. As pointed out above, according to the Assessing Officer, the aforesaid discounted charges by t .....

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..... eration. He has filed detailed written submissions, which are reproduced hereunder: SUBMISSIONS OF REVENUE ON SPECIFIC ASPECTS 1. The Revenue emphatically relies on the assessment orders of the relevant assessment years as well as directions of the DRP. 2. Without prejudice to these, following additional submissions are made. 3. These submissions below are ONLY on specific aspects. On balance aspects, oral submissions during the hearing, the Assessment Order as well as specific portions, favourable to Revenue, of DRP's orders are relied upon. 4. It is Revenue's humble submission and contention that the Hon'ble Tribunal could differ from its earlier decision, in view of decision of the Hon'ble Supreme Court in the case of Union of India v. Raghubir Singh [1989] 178 ITR 548 and that this is a fit case to do so. This aspect is detailed below. CARGILL TSF ASIA PTE L TO, SINGAPORE I AY 2008-09 5. The Ld. AR has relied, inter alia, on the orders of the Hon'ble ITAT in the assessee's own case in AYs 2005-06, 2006- 07, 2007-08 (combined order dated 19.08.2011) which have also been confirmed by the Hon'ble HC, Delhi (combined or .....

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..... mpany pays money to the Indian Company, which invests it in India and the assessee gets a fixed predetermined interest rate. The payment of interest together with the principal by the Indian company to the assessee is routed through another group company, which is called the buyer of goods. It is important to note that promissory notes are given by the non-resident buyer prior to raising of invoice by the Indian company . 12. The thrust of Revenue's present submission, is that none of the above referred orders of Hon'ble ITAT (i.e., earlier orders of ITAT in the case of the assessee itself, or its orders in the cases of CFSPL CGTIPL which have been relied and quoted by the ITAT in the case of the assessee) have considered and adjudicated the entire set of facts and circumstances. This has been very briefly highlighted above (at para 9,10,11) and has been detailed below. Thus, the Hon'ble ITAT and Hon'ble High Court have addressed only the legal issue as summarised at Para 6 above without addressing the facts and circumstances that lead to the unmistakable conclusion that the assessee, along with its related concerns, have put through colourable transactions .....

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..... t by the assessee resulting into no tax payment by the entire group in India. Page 10-11 Page 9-9.1, Page 12 Last two para Page 17 Page 9,12 Assessee has placed heavy reliance on discounting being without recourse. This has been analysed in light of RBI regulations and facts of the case and has been found to be of no help to the assessee and is also without supporting evidence. Page 11, Para 9.2-9.3 Page 13 Para (iv) (v),(i) Page 14 Para (ii) The paper transactions of the assessee have been highlighted along with its non-compliance. The definition of interest in the Income Tax Act and the DTAA has been put in perspective Page 11-12 Para 9.4 -9.6 Assessee's reliance on CBDT circulars is analysed and rejected. Critical observations therein include (i) Assessee has not approached bankers for discounting of so called bills; (ii) PNs of group concerns are not freely transferable by endorsement and delivery; (iii) The case of the assessee is a private arrangement .....

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..... A No. 63212012 and ITA No. 62412012) Cargill TSF Asia Pte Ltd A Y 2005-06, A Y 2006-07 A Y 2007-08 (Delhi IT AT) (IT A No. 5811De1l2010, 3880IDell2010 and 30571De1l2010) DIT v Cargill Financial Services Asia Pvt Ltd A Y 2004-05 and A Y 2005-06 (Delhi High Court) (ITA 269/2012 and ITA 272/2012) ADIT v Cargill Financial Services Asia Pte Ltd A Y 2004-05 and A Y 2005-06 (Delhi IT AT) (IT A No. 579IDell20 10 and IT A No. 580IDell20 1 0) Further, it is pertinent to mention that in the Indian entities case being M/s Cargill Global Trading India Pvt. Ltd. and M/s Cargill India Pvt. Ltd. for the same A Y i.e. A Y 2008-09, the Ld. CIT(A) has held that the discounting charges paid to appellant (Cargill TSF Asia Pte Ltd) are not in the nature of interest and thus, no disallowance U/S 40(a)(i) was warranted. This order has been accepted by the Department and no further appeal was preferred. The facts and the issue involved in the above mentioned assessment years are identical to. the facts and issue involved in the years in question i.e. whether discounting charges is akin to interest income as defined u/s 2(28A) of the Act, taxable as per the provisions o .....

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..... what needs to be adjudicated. It is also submitted that making such bold allegations that certain material facts and roles played by the respective enterprises was not presented has no bearing on the issue. This is nothing but a misguided effort on behalf of the revenue to confuse the issue. At this juncture, it is also respectfully submitted that it is a settled proposition of law that the revenue cannot dictate to the taxpayer businessmen as to how to conduct its affairs and the question of commercial expediency cannot be raised by the revenue at this stage or at any stage prior. Hence, objections raised are of no consequence and deserves to be ignored. Contention No.2: Para 11 and para 12 of the Ld. DR's submission The finding of the Hon'ble DRP that the whole transaction is a colorable device merely entered by the Appellant to earn higher rate of interest on funds (which are lying idle abroad) and are give to Indian group companies, under the shelter of the discounting transaction, which in turn invests it in India and earns fixed pre-determined interest rate is merely an allegation and devoid of any material on record to prove the same. 'At the outset, it is .....

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..... e powers and scope vested in the assessing officer and as such deserves to be ignored. At this juncture, we would like to highlight the fact that the AOIDRP cannot question the genuineness of expenditure/ transactions being undertaken by an entity with any party unless there is something on record to prove otherwise. Reliance in this connection is placed on Supreme Court judgment of SA Builders v CIT 288 ITR 1 and Delhi High Court judgment of CIT v Dalmia Cements Pvt Ltd 254 ITR 377. Contention No.3: Para 13 of the Ld. DR's submission i.e. Arguments culled out from the DRP's order Contention on non-cooperation of the assessee in respect of submitting complete trail of documents and limited information available by the assessee: The Appellant had duly submitted all the vital documents pertaining to bill discounting vis a vis invoice raised by Indian group company on offshore buyer of goods, promissory note issued by offshore buyer of goods, discounting agreement between the Appellant and Indian group entity. Moreover, the relevant documents required by the Appellant for undertaking a usual business transaction has been duly submitted by the Appellant during asses .....

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..... resses this point, but on an illustration to be given, the attention of the Hon'ble Tribunal is invited into the question No. VI which reads as under: (vi) What was the need of the Indian company for funds for which it approached the assessee for discounting? This is in itself would show that the revenue is questioning the commercial expediency of the transaction which it is not permissible. It is thus accordingly prayed that the written submission filed by the revenue are not determinative of any material fact or position of law and deserves to be ignored. As stated above, the issue is squarely covered in favor of the assessee by the decision of the Tribunal, the Hon'ble High Court and the Hon'ble Supreme Court. Contention No.4: Reliance on judgment in Raghubir Singh [1989] 178 ITR 548 (SC) Reliance on this judgment has been placed stating that the Hon'ble IT AT can deviate from its earlier decision as the vital points have not been considered. However, the Appellant would like to submit that all the facts of the transaction were duly presented before various authorities arid after consideration of necessary facts, the Hon'ble HC and .....

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..... atter of the appeals constitutes the original grounds of appeal and such additional ground/grounds as may be raised with the leave of the Tribunal. 14. We have considered the rival submissions and have perused the record of the case. We have extensively reproduced the submissions of both the department and assessee, in order to appreciate the specific objections raised by revenue. 15. Now we proceed to consider the alleged distinguishing features pointed out by ld. DR in his detailed submissions, reproduced above. In order to appreciate the submissions of ld. CIT(DR), we have to first consider the brief background of the case. 16. The assessee is a company incorporated under the laws of Singapore and is tax resident of Singapore. It had entered into an agreement for cost sharing with Indian party for rendering certain services. Besides this, assessee had also discounted the bills of exchange (BE)/ demand promissory notes (PN) of certain Indian group entities i.e. Cargill India Pvt. Ltd. and Cargill Global Trading Pvt. Ltd. The assessee did not offer the income earned by it on discounting the PN of Cargill India Pvt. Ltd. on the ground that the same was in the nature of .....

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..... ing charges in its hands and this issue has been settled by the decision of Hon ble Delhi High Court in the case of Cargill Global Trading Pvt. Ltd. (supra). Thus, the issue stands settled by Hon ble Jurisdictional High Court and the SLP filed by the department in the case of Cargill Global Trading India Pvt. Ltd. has been dismissed. The decision of Cargill Global Trading India Pvt. Ltd. has been followed in the case of assessee, as noted earlier. 18. Now the first aspect pointed out by ld. CIT(DR) with reference to para 7.8 at page 15 of assessment order is with reference to role of Cargill Inc. The said para is reproduced hereunder:- 7.8 As per the last order of the Ld. ITAT in the case of CGTIPL wherein appeal of I CGTIPL has been allowed inl.T.A. No.684/Del/2009 for A.Y. 2004-05 and subsequent years, this income of the assessee is held to be of not of the nature of interest however that order is passed by the Ld. IT AT wherein complete facts were not presented and specially facts relating to the assessee (Cargill TSF Asia Pte Ltd), role of Cargill Inc., role of buyer Cargill IntI. SA., RBI Circulars, FEMA provisions etc. were not presented before the Ld. IT AT whi .....

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..... s between group company and the Indian company was obliged to recover the money from the buyer of alleged group, there was no risk involved in the transaction. The conclusion drawn by ld. DRP on this basis is that the obligation by the RBI to recover the money in fact changes the nature of the term without recourse . We do not find any substance in the observations of ld. DRP on this basis. The issue before us is whether the discounting charges, received by assessee on maturity of promissory note on realization of proceeds from the buyer, were in the nature of discounting charges or interest. The RBI regulations cannot decide the true nature of receipt in the hands of assessee. Had there been any violation of RBI regulation in the whole transaction, then action would have been initiated against the assessee in accordance with law. The conclusion drawn by ld. DRP is that as per the definition of interest in the Indian Income-tax Act and the DTAA the amount paid by the assessee is a debt to the Indian company and the assessee company has recovered the said debt with interest from the Indian company through another group company. In our opinion, this aspect has received specific cons .....

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