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2016 (7) TMI 247 - ITAT DELHI

2016 (7) TMI 247 - ITAT DELHI - TMI - Interest on advances to subsidiaries - whether advance made was out of the EEFC account which carries no interest? - Held that:- AO is directed to verify the interest rate and recompute the adjustment on account of interest by applying the rate of interest of the relevant currency in the AY 2009-10 & 2010-11. Accordingly this ground of the assessee is partly allowed for AY 2009-10 & 2010-11. - As regards the addition on this account in assessment year 20 .....

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n the case of Bharti Airtel Ltd. vs. ACIT [2014 (3) TMI 495 - ITAT DELHI ]. Thus the AO is directed to verify the date of conversion of loan to share application money and not to make any adjustment on account of interest post conversion of loan to share application money and accordingly this ground of the assessee is allowed for statistical purpose. - Disallowance under section 14A - Held that:- As regards first contention that no satisfaction has been recorded we note from the assessment o .....

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in the case of Joint Investments Pvt. Ltd. versus Commissioner of Income Tax [2015 (3) TMI 155 - DELHI HIGH COURT ]. Accordingly we direct the AO to restrict the addition to the exempt income.- Decided partly in favour of the assessee. - ITA Nos. 1086 to 1091/Del/2015 - Dated:- 5-5-2016 - SHRI I.C. SUDHIR AND SHRI PRASHANT MAHARISHI For The Assessee : Shri Ved Jain, Adv. For The Department : Shri Sanjay Kumar, Sr. DR ORDER PER I.C. SUDHIR: JUDICIAL MEMBER These are six appeals filed by the asse .....

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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 and TULSI and exported its .....

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ompanies and held that the assessee ought to have charged interest in respect of such loans and accordingly the TPO recommend that interest as per the Prime Lending Rate of State Bank of India be added as income on account of adjustment of arm s length price. Thereafter the AO passed the draft assessment order making additions as recommended by the TPO. 6. Aggrieved by the order of the TPO, the assessee filed objection before the Dispute Resolution Panel. It was contended by the assessee that si .....

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nterest rate be charged be only base rate and further adjusted by 150 basis point in terms of Safe Harbour Rules. On the issue of addition under Section 14A, the learned DRP confirmed the action of the AO. 8. Aggrieved by the order of the learned DRP and the final assessment order passed by the AO the assessee is in appeal before us. 9. It was contended by the learned AR that the AO was not justified in tinkering with the assessment for assessment years 2006-07 to 2008-09 as these assessments ha .....

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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. I .....

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contention the learned AR relied upon the judgment of the Coordinate Bench of the ITAT in the case of Cotton Natural India Pvt. Ltd. vs. DCIT, Circle 3(1), New Delhi 142 ITD (Del) 662 which has also been confirmed by the jurisdictional Delhi High Court. The learned AR also relied upon the following judgments of the ITAT:- (i) Siva Industries & Holdings Limited Vs ACIT (2011) 59 DTR 0182 (ii) Tata Autocomp Systems Limited Vs ACIT (2012) 73 DTR 0220 (iii) Four Soft Ltd. Vs DCIT (2014) 106 DTR .....

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Bench of the ITAT in the case of Bharti Airtel Limited vs ACIT, ITA NO. 5816/D/2012 dated 11.03.2014. The learned AR also relied upon the following judgments:- (i) Pan India Network Infravest Private Limited vs ACIT (ITA No. 7026 & 7025 /Mumbai/2013 dated 04.12.2015 (ii) CIT Vs EKL Appliances, ITA No. 1068/2011 and 1070/2011 (iii) Parle Buiscuits P Ltd Vs DCIT (ITA No. 9010/Mum/2010) dated 11.4.2014 ITAT Mumbai (iv) All cargo Logistics Ltd Vs ACIT (2014) 150 ITD 0651 dated. 10.6.2014 13. On .....

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in any case the disallowance under Section 14A cannot exceed the dividend income earned by the assessee company. 15. The learned DR, on the other hand, supported the order passed by the TPO as modified by the learned DRP. It was contended that the order passed by the TPO as well as the learned DRP on the issue of adjustment of interest is a speaking order. It was further contended that once the search has been initiated all the assessments get reopened consequent to the issue of notice under se .....

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are 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 .....

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sessment years without there being any incriminating material and in absence of the abatement of assessment orders already framed. This issue is now squarely covered by the judgment of the jurisdictional Delhi High Court in the case of CIT (Central) - III vs. Kabul Chawla (Supra) wherein the Hon ble High Court has been pleased to hold as under:- 37. On a conspectus of Section 153A(1) of the Act, read with the provisos thereto, and in the light of the law explained in the aforementioned decisions .....

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The AO will exercise normal assessment powers in respect of the six years previous to the relevant AY in which the search takes place. The AO has the power to assess and reassess the 'total income' of the aforementioned six years in separate assessment orders for each of the six years. In other words there will be only one assessment order in respect of each of the six AYs "in which both the disclosed and the undisclosed income would be brought to tax". iv. Although Section 15 .....

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he completed 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 .....

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. 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 during the search, no additions could have been made to the income already assessed. 39. The question framed by the Court is answered in favour of the Assessee and against the Revenue. The above view has been reiterated by the Hon ble Delhi High Court in the case of CIT-7 vs. RRJ Securities Ltd. in [2 .....

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in Commissioner of Income Tax (Central)-III v. Kabul Chawla: ITA707/2014, decided on 28th August, 2015 has held that completed assessments could only be interfered with by the AO on the basis of an incriminating material unearthed during the course of the search or requisition of the documents. In absence of any incriminating material, the AO does not have any jurisdiction to interfere in concluded assessments. In the present case, as stated hereinabove, the addition has been made without there .....

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appeals filed for these assessment years are allowed. 20. As regards assessment years 2009-10 and 2010-11 are concerned the learned DRP has confirmed the addition applying the base rate of State Bank of India plus 150 basis points. It was the contention of the learned AR that no addition can be made as the advance made was out of the EEFC account which carries no interest. Further amount advanced was for promoting its business. On this issue we are not in agreement with the contention of the lea .....

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dvances 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 India .....

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nterest payable on the currency or legal tender of the place or the country of residence of either party. Interest rates applicable to loans and deposits in the national currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the Central bank, mandate of the Government and several other parameters. Interest rates payable on currency specific loans/ deposits are significantly universal and globally applicable. The currency in which the loan is to be re-paid n .....

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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.B1. II 725 (1994), re. 1 § AStG). A differentiation between debt-claims 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 situat .....

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ching 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 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 .....

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h 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 completely refrained from making investment for which it borrowed the money. The aforesaid methodology recommended by Klaus Vogel a .....

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. They are not dependent upon the PLR rate, which is applicable to loans in Indian Rupee. The PLR rate, therefore, would not be applicable and should not be applied for determining the interest rate in the extant case. PLR rates are not applicable to loans to be re-paid in foreign currency. The interest rates vary and are thus dependent on the foreign currency in which the repayment is to be made. The same principle should apply. 21. Accordingly the applicable rate of interest shall be the rate .....

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F 50,00,000 (Converted to Share Application Money) The interest rates applicable in respect of these currencies during these years, as submitted by the learned AR, were as under:- Assessment year Currency wise LIBOR Rate USD ($) EURO(€) Swiss Franc(CHF) AY 2009-10 3.089% 4.822% 2.896% AY 2010-11 1.559% 1.604% 0.800% AY 2011-12 0.923% 1.327% 0.554% Taking into consideration of the above facts, the learned AO is directed to verify the above interest rate and recompute the adjustment on accoun .....

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n. The TPO is not permitted under the law to re-characterize the transaction and accordingly we are of the view that no interest on such share application money can be charged. The above view is supported by the judgment of the Coordinate Bench of the ITAT in the case of Bharti Airtel Ltd. vs. ACIT, [2014] 161 TTJ 0283 (Del) wherein the ITAT has 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 ap .....

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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 .....

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