Income Tax Appellate Tribunal - Ahmedabad
The Dcitpatan Circle,, Patan vs M/S. Gokul Refoils & Solvent Ltd.,, ... on 1 November, 2018
ITA No.: 2403/Ahd/15 Assessment year: 2011-12 Page 1 of 7 IN THE INCOME TAX APPELLATE TRIBUNAL, AHMEDABAD D BENCH, AHMEDABAD [Coram: Pramod Kumar VP and Mahavir Prasad JM] ITA No.: 2403/Ahd/15 Assessment year: 2011-12 Dy Commissioner of Income Tax Patan Circle, Patan .............................Appellant Vs Gokul Refoils & Solvent Ltd ............................Respondent Sujanpur Patiya, Highway Road Sidhpur 384 151 [PAN: AAACG8316N] Appearances by Lalit P Jain for the appellant Tushar Hemani for the respondent Date of concluding the hearing : August 2, 2018 Date of pronouncement : November 1, 2018 O R D E R Per Pramod Kumar, VP:
1. By way of this appeal, the Assessing Officer has challenged correctness of the learned Commissioner (Appeals)'s order dated 1st May 2015, in the matter of assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2011-12.
2. The appeal raises as many as seven grounds of appeal but the two short issues that we are really required to adjudicate in this case are whether or not the CIT(A) was justified in deleting the arm's length price adjustments of Rs 44,99,894 in respect of interest on loans advanced to the associated enterprises, and of Rs 2,26,06,447 in respect of guarantee commission for the corporate guarantees issued by the assessee in favour of its associated enterprises. Learned representatives fairly agree on this proposition.
3. As regards the ALP adjustment of Rs 2,26,06,447, it is sufficient to take note of the fact that in the immediately preceding assessment year in assessee's own case, learned CIT(A) had held that the payment of guarantee commission @ 1.375% was at an arm's length consideration, and the order so passed by the CIT(A) had attained finality inasmuch as the revenue authorities did not challenge the relief so granted by the CIT(A). In the present year, the assessee, on his own, has offered ALP adjustment @ 1.5% as arm's length consideration for the issuance of guarantees- which is clearly more than the arm's length guarantee commission held in the immediately preceding assessment year. When the arm's ITA No.: 2403/Ahd/15 Assessment year: 2011-12 Page 2 of 7 length consideration of guarantee commission at 1.5% is more than what has been judicially held to be arm's length consideration for guarantee commission, there cannot normally be any basis to hold that further ALP adjustment is required. It is on this basis that the CIT(A) has granted the impugned relief from the Assessing Officer's finding that the ALP of guarantee commission should be computed at 4.67%. At the assessment stage, guarantee commission @ 4.67% on US $ 15 million for 82 days and US $ 16.5 million for 283 days was thus worked out at Rs 3,36,57,099. The ALP determined by the assessee suo motu at Rs 1,190,50,652 was thus found short by Rs 2,26,06,447. That ALP adjustment has been, for the reasons set out earlier, was deleted by the CIT(A). The Assessing Officer is not satisfied and is in appeal before us.
4. We have heard the rival contentions, perused the material on record and considered facts of the case in the light of the legal position.
5. We find that though there is no res judicata in the income tax proceedings, once a fundamental aspect, permeating through different assessment years, is decided in a particular manner by the judicial authorities and the Assessing Officer allows that aspect to reach finality, there is no reason normally, unless there is a change in the material facts and circumstances, to deviate from the same. Viewed thus, from the point of view of consistency, the stand of the CIT(A) must be upheld. While dealing with this aspect of the matter, we may usefully refer to the observations of Hon'ble Supreme Court, in the case of Radhasoami Satsang Vs CIT [(1992) 193 ITR 321 (SC)], as follows:
13. We are aware of the fact that strictly speaking res judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assess ment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.
14. On these reasonings in the absence of any material change justifying the revenue to take a different view of the matter--and if there was no change it was in support of the assessee--we do not think the question should have been reopened and contrary to what had been decided by the Commissioner in the earlier proceedings, a different and contradictory stand should have been taken.
6. There is one more way of looking at the matter. It is a case in which the Assessing Officer has accepted the relief granted by the CIT(A) in one year and challenged the similar relief in the next year. That course of action does not seem legally permissible. As the settled legal position is, even if the relief granted by an appellate authority is accepted in the case of one assessee, it cannot be challenged in appeal, on similar facts and without a just cause, for another assessee. In the case before us, the relief granted by the CIT(A) is accepted in a case in one year and in the same case, it has been challenged, in further appeal, in the next year, and no reasons whatsoever have been assigned for such a deviation. In the case of Union of India v. Kaumudini Narayan Dalal [2001] 249 ITR 219, Hon'ble Supreme Court had an occasion to consider whether it is open to revenue to accept a judgment in the case of one assessee, and appeal, against the identical judgment in the case of another. Their Lordships ITA No.: 2403/Ahd/15 Assessment year: 2011-12 Page 3 of 7 held that such a differential treatment on the same set of facts was not permissible in law, and observed that, "it is not open to revenue to accept the judgment in the case of the assessee in that case and challenge its correctness in the case of another assessee, without just cause."
The same view was reiterated by the Hon'ble Supreme Court in the case of Berger Paints India Ltd. v. CIT [2004] 266 ITR 992, and followed by the Hon'ble Delhi High Court in the cases of CWT v. R.K.K.R. International (P.) Ltd. [2005] 198 CTR 567 and CIT v. Neo Poly Pack Pvt. Ltd. [2000] 245 ITR 492. When it is not possible for the revenue to challenge an order of the appellate authority in one case and when it has accepted identical order of the appellate authority in another case, it cannot at all be open to the revenue, without any just reason, to challenge the order of the appellate authority on an issue on which relief has been given by CIT(A) in the case of that very assessee and the matter rests there by not being challenged in appeal. For this reason also, the relief granted by the CIT(A) cannot be faulted with.
7. There is still another reason for not disturbing the relief granted by the CIT(A). The issue whether issuance of corporate guarantees can at all be treated as international transaction has been decided in favcour of the assessee by a coordinate bench decision in the case of Micro Ink Ltd Vs ACIT [(2015) 63 taxman.com 353 (Ahd)] and an appeal, at the instance of the revenue authorities, against the said order is admitted, and pending for disposal, before Hon'ble jurisdictional High Court. Therefore, the call as to whether a corporate guarantee can be treated as international transaction is yet to be taken by Hon'ble jurisdictional High Court, the matter is alive but, for the time being, in the light of this Tribunal's decision, the issue is covered in favour of the assessee. For this reason alone, grievance of the revenue is somewhat academic at this stage. Be that as it, we are not inclined to deal with this larger issue in this case.
8. In view of the detailed reasons set out above, as also bearing in mind entirety of the case, we approve the conclusions arrived at by the learned CIT(A) and decline to interfere in the matter so far as ALP adjustment in respect of corporate guarantees is concerned.
9. Let us now turn to arm's length price adjustments of Rs 44,99,894 in respect of interest on loans advanced to the associated enterprises.
10. So far as this issue is concerned, it is sufficient to take note of the fact that the assessee has benchmarked the loan on the basis of internal CUP by way of the interest rate on which the assessee has borrowed from the outside agencies. In other words, the stand of the assessee is that the interest rate at which the assessee has borrowed foreign currency loan from the banks should be treated as arm's length interest for the loans it has advanced to its subsidiaries. This approach was, however, rejected by the TPO by observing as follows:
"i. It is seen that there are short term advance credits granted by SBI basically in the nature of letters of credit against goods purchased by the assessee company. These LCs are supported by 100% guarantee as well as the goods purchased by the assessee and in general, short term risks carrying smaller spreads than long term loans.
ii. The financial status and hence the default credit rating of the assessee company is higher than that of the AEs whom loans have been given by the ITA No.: 2403/Ahd/15 Assessment year: 2011-12 Page 4 of 7 assessee. Hence, even if these instances are adopted for benchmarking the transaction, they will have to be adjusted to factor the credit differential between the assessee and its AE.
iii. In light of the two major differences between the loans given by the assessee to its AE and the internal CUP cited, the submission made by the assessee that these present a perfect CUP for transaction under reference is not correct. Hence, the CUP presented by the assessee company is not found acceptable and is rejected."
11. Aggrieved, assessee carried the matter in appeal before the CIT(A). Learned CIT(A) upheld the stand of the assessee and observed as follows:
"..... it is a settled law that internal comparable rates, if applicable, should be adopted as arm's length price. The year under appeal, the applicant has offered interest rate of 1.356 (LIBOR + 100 Basis) suo moto in respect of loans advanced to its Associated Enterprises. The appellant has availed loans from banks in foreign currency from international banks at cheaper rate details of which are compiled on page no. 29 of the paper book. The highest rate at which loans have been availed are at 1.275% per annum by the appellant. The appellant has charged 1.357% p.a. from its Associated enterprises. Therefore I hold that the rate charged by the appellant meets the arm's length test. Accordingly the addition made by the AO/TPO charging interest rate above 1.357% p.a. is deleted. The ground is accordingly allowed."
12. The Assessing Officer is aggrieved of the relief so granted by the CIT(A) and is in appeal before us.
13. We have heard the rival contentions, perused the material on record and duly considered the facts of the case in the light of applicable legal position.
14. In our considered view, as long as there is no dispute about the fact that the transactions between the assessee and its lenders are independent transactions, i.e. transactions between non associated enterprises, the interest rates charged on these transactions are valid internal CUP inputs. We have noted that it is not even revenue's case that these transactions, interest rate on which are treated as internal CUP inputs, are not independent transactions. In our considered view, the internal CUP is most appropriate method on the facts of this case. What is objected to by the revenue authorities is that the transactions between the assessee and its lenders, and the assessee and its AEs, are incomparable inasmuch as the credit rating of the assessee's AEs is much lower than the assessee and the transactions are relatively unsafe, and, therefore, what holds good for the assessee does not necessarily hold good for the AEs. That approach ignores the ground reality that the loan having been granted to an enterprise which is under full control is a relatively safe loan, and such a loan, even in an arm's length situation, has lesser risk perception. As we deal with this aspect of the matter, we may take note of a coordinate bench decision in the ITA No.: 2403/Ahd/15 Assessment year: 2011-12 Page 5 of 7 case of UFO Movies Ltd Vs ACIT [(2016) 66 taxmann.com 120 (Delhi - Trib.)], wherein the coordinate bench had, inter alia, observed as follows:
7. While exploring such possibilities, it will be useful to take note of the fact that in the case of Bharti Airtel Ltd. v. Addl. CIT [2014] 64 SOT 50 (URO)/43 taxmann.com 50 (Delhi), and a coordinate bench had deleted a similar ALP adjustment on account of interest amounting to Rs. 10,11,786 wherein the same approach of adopting 400 basis points above the LIBOR as ALP was adopted. While deleting this ALP adjustment, speaking through one of us, the Tribunal had, inter alia, observed as follows:--
......................
7.11 Adjustment for security Usually, bankers extending loans in foreign currency also insist on sufficient security. In this case, no security is offered by the AE. Keeping in view the financial health of the subsidiary, it may not be in a position to offer security. Thus an adjustment is required to be made for not offering a security. This may be computed as the difference between the interest rates prevailing for the bonds of equivalent credit rating of the AE and sovereign government bonds in the country in which the AE is located. This can also be considered as the guarantee cost payable to the taxpayer for giving guarantee for equivalent amount of loan given to the AE i.e. the rate differential for the difference in interest spread between the credit rating of the taxpayer and the AE. Thus after the above analysis, the equivalent interest rate is the interest rate including the transaction cost for a foreign currency loan, if given to the AE for its credit standing/rating.
66. We see no substance in this adjustment either. The TPO has taken the lender as the tested party, and yet made adjustments for higher risks on account of assumed lack of security and increased risk of single party dealing. This approach overlooks the fact that the assessee has advanced monies to its subsidiaries which are under its management and control- a factor which substantially reduces the risk rather than increasing it. On these facts, it is difficult to understand, much less approve, any rationale for adjustment on account of higher risks. On this point also, we see no merits in the stand of the TPO. (Emphasis, by Underlining, Supplied by us now)'
8. When the matter was carried in further appeal, this time by the Commissioner, before Hon'ble Delhi High Court, Their Lordships were, vide judgment, dated 25th February 2015- a copy of which was placed before us by the learned counsel, pleased to approve the reasoning adopted by the Tribunal. In doing so, Their Lordship observed as follows:--
"8. The ITAT has also taken note of the fact that two specific comparables of USD borrowings i.e. L&T and Seri Infrastructure, on the interest rate of Libor had been taken into consideration. There is no material whatsoever, save and except for vague observations about weak financials of the subsidiaries - which are not supported by any specific facts and proceed on sweeping generalizations and ITA No.: 2403/Ahd/15 Assessment year: 2011-12 Page 6 of 7 assumptions, to reject the comparables taken by the assessee. When a Transfer Pricing Officer rejects comparables taken by the assessee, he has to set out specific, cogent and legally sustainable reasons for doing so. On this point, therefore, the stand of the Assessing Officer cannot be accepted.
9. . . . . . . . . . . . . . . . . . . . . .
10. The Tribunal further noticed that the assessee advanced monies to the subsidiaries which were under its management and control, which in fact substantially reduced the risk and in these circumstances there was no rationale of adjusting any amount of higher basis.
11. This Court is of the opinion that the reasoning of the ITAT on each of the heads which went into the adjustment of Rs. 10,11,786/- is reasonable and justified and does not call for any interference. (Emphasis, by Underlining, Supplied by us)"
9. That was also a case in which the lender parent company was taken as the tested party, the loan was advanced to a subsidiary company without much to the credit of its financial credentials and the loan was treated as a high risk loan resulting in adopting the maximum LIBOR rate on which dollar loans were advanced. Yet, Hon'ble High Court specifically approved the Tribunals reasoning that the "assessee advanced monies to the subsidiaries which were under its management and control, which in fact substantially reduced the risk and in these circumstances there was no rationale of adjusting any amount of higher basis". When such are the views of Their Lordships, it is futile to suggest that the loans advanced by the parents to subsidiary can indeed be taken as BB to D grade investments which refers to, as noted by the TPO himself at page 28 of the order, investments with serious risks of inadequate safety, investments of high risk, investments of substantial risk and investments of default. The approach adopted by the DRP cannot, therefore, meet our approval.
15. We are in respectful agreement with the approach implicit in the above observations, which has also found favour with Hon'ble Delhi High Court. The case as made out for lower credit rating of the AE was thus devoid of any legally sustainable merits, and the CIT(A) rightly rejected that theory. We approve the conclusions arrived at by the CIT(A) and decline to interfere on this count as well.
16. On second issue also, the appeal of the Assessing Officer does not meet our approval.
17. In the result, the appeal is dismissed. Pronounced in the open court today on the 1st day of November, 2018.
Sd/- Sd/-
Mahavir Prasad Pramod Kumar
(Judicial Member) (Vice President)
Ahmedabad, dated the 1 st day of November, 2018
ITA No.: 2403/Ahd/15
Assessment year: 2011-12
Page 7 of 7
Copies to: (1) The appellant (2) The respondent
(3) CIT (4) CIT(A)
(5) DR (6) Guard File
By order
Assistant Registrar
Income Tax Appellate Tribunal
Ahmedabad benches, Ahmedabad