Income Tax Appellate Tribunal - Mumbai
Il & Fs Transportation Network Ltd, ... vs Addl Cit 14(1), Mumbai on 19 December, 2018
ITA NO(s). 2393/Mum/2015 & 2568/Mum/2015, A.Y.2009-10 1
IL&FS Transportation Networks Ltd. Vs Addl.CIT-14(1) &
ACIT-14(2)(1) Vs. IL&FS Transportation Networks Ltd.
IN THE INCOME TAX APPELLATE TRIBUNAL "K" BENCH, MUMBAI
BEFORE SHRI G. MANJUNATHA, AM AND SHRI RAVISH SOOD, JM
ITA No. 2393/Mum/2015
(निर्धारण वषा / Assessment Year:2009-10)
IL&FS Transportation Networks Additional Commissioner of Income
Limited, Plot No. C-22, G Block बिधम/ Tax- 14(1) [Erstwhile Additional
Bandra Kurla Complex, Bandra Vs. Commissioner of Income Tax-10(1)],
(E), Mumbai-400 051. Mumbai.
स्थामी रेखा सं ./ जीआइआय सं ./ PAN No. AABCC5460A
(अऩीराथी /Appellant) : (प्रत्मथी / Respondent)
ITA No. 2568/Mum/2015
(निर्धारण वषा / Assessment Year:2009-10)
Assistant Commissioner of IL&FS Transportation Networks
Income Tax- 14(2)(1), Mumbai- बिधम/ Limited, Plot No. C-22, G Block
400 020. Vs. Bandra Kurla Complex, Bandra (E),
Mumbai-400 051.
स्थामी रेखा सं ./ जीआइआय सं ./ PAN No. AABCC5460A
(अऩीराथी /Appellant) : (प्रत्मथी / Respondent)
अऩीराथी की ओय से / Appellant by : Shri Dilip V. Lakhani, A.R
प्रत्मथी की ओय से/Respondent by : Shri Anand Mohan, D.R
सुनवाई की तायीख / : 04.12.2018
Date of Hearing
घोषणा की तायीख / : 19.12.2018
Date of Pronouncement
ITA NO(s). 2393/Mum/2015 & 2568/Mum/2015, A.Y.2009-10 2
IL&FS Transportation Networks Ltd. Vs Addl.CIT-14(1) &
ACIT-14(2)(1) Vs. IL&FS Transportation Networks Ltd.
आदे श / O R D E R
PER RAVISH SOOD, JUDICIAL MEMBER:
The present cross appeals filed by the assessee and the revenue are directed against the order passed by the CIT(A)-56, Mumbai, dated. 19.02.2015, which in turn arises from the assessment order passed by the A.O u/s 143(3) r.w.s 144C(5) of the Income Tax Act, 1961 (for short „I.T. Act‟), dated. 29.04.2013. The assessee has assailed the order of the CIT(A) by raising the following grounds of appeal before us:
"1. On the facts and in the circumstances of the case and in law, the appellant prays that provisions of Section 14A read with Rule 8D are not applicable and no disallowance should be made u/s 14A read with Rule 8D(2)(iii). The addition confirmed by the Learned Commissioner of Income Tax (Appeals) amounting to Rs. 1,88,87,845/- being 0.5% of the average investments may be deleted.
2. On the facts and in the circumstances of the case and in law, the Learned Commissioner of Income Tax (Appeals) has erred in confirming the disallowance of the administrative expenses of Rs. 1,88,87,845/- under Rule 8D(2)(iii) of Income Tax Rules. The appellant prays that the conclusion reached by Learned Commissioner of Income Tax (Appeals) is erroneous and the said addition may be deleted.
3. On the facts and in the circumstances of the case and in law, the Learned Commissioner of Income Tax(Appeals) has erred in rejecting the claim of the appellant that provisions of Rule 8D(2)(iii) is not applicable to the administrative expenses and no disallowance should be made u/s. 14A r.w.r. 8(D)(2)(iii). The addition confirmed by the Learned Commissioner of Income Tax(Appeals) may be deleted.
4. On the facts and in the circumstances of the case and in law, the Learned Commissioner of Income Tax(Appeals) has erred in confirming disallowance of Rs. 1,88,87,845/- u/s 14A of the Income Tax Act, 1961, by applying the provision of Rule 8D(2)(iii) of the Income Tax Rules against Nil Dividend Income.
5. On the facts and in the circumstances of the case and in law, the appellant prays that the appellant has not incurred any administrative expenses which can be attributable to earning income not chargeable to tax. The appellant prays that the addition confirmed by the Learned Commissioner of Income Tax(Appeals) may be deleted.
ITA NO(s). 2393/Mum/2015 & 2568/Mum/2015, A.Y.2009-10 3 IL&FS Transportation Networks Ltd. Vs Addl.CIT-14(1) & ACIT-14(2)(1) Vs. IL&FS Transportation Networks Ltd.
6. On the facts and in the circumstances of the case and in law, the Learned Commissioner of Income Tax(Appeals) has erred in confirming the addition of Rs. 11,04,04,539/- made by way of the adjustment to the international transaction in terms of the order passed by the Deputy Commissioner of Income Tax, Transfer Pricing u/s. 92CA(3) of the Income Tax Act, 1961. The appellant prays that the addition made by the Learned Commissioner of Income Tax (Appeals) amounting to Rs. 11,04,04,539/- by way of adjustment to the international transaction is not justified and be deleted.
7. On the facts and in the circumstances of the case and in law, the Learned Commissioner of Income Tax(Appeals) has erred in adopting the interest rate of 15.41% for the purpose of making additions in respect of international transaction. The appellant prays that the rate adopted by the Learned Commissioner of Income Tax (Appeals) is not justified and for the purpose of computing arm's length price the interest rate of 15.41% may not be considered.
8. On the facts and in the circumstances of the case and in law, the Learned Commissioner of Income Tax(Appeals) has erred both on facts and in law in ignoring the contention of the appellant that the comparison made by the Transfer Pricing Officer for determining the rate of interest on international transaction of granting loan to three associate enterprises is unjustified.
9. On the facts and in the circumstances of the case and in law, the Learned Commissioner of Income Tax(Appeals) has erred both of facts and in law in ignoring the contention of the appellant that the interest rate in respect of international transaction in foreign currency has to be in accordance with LIBOR/EURIBOR.
10. On the facts and in the circumstances of the case and in law, the appellant prays that no addition by way of adjustment in respect of international transaction of granting loan to three associate enterprises be made and the interest income offered by the appellant in respect of the international transactions of granting loans to three associate enterprises be accepted.
11. On the facts and in the circumstances of the case and in law, the appellant prays that the addition confirmed by the Learned Commissioner of Income Tax (Appeals) amounting to Rs. 11,04,04,539/- to the international transaction of giving loan to the subsidiary companies may be deleted.
12. The appellant craves leave to add, amend, alter, modify, add to, abridge, vary and/or withdraw any or all the above grounds of appeal in future, which are without prejudice to one other."
The revenue on the other hand has challenged the order of the CIT(A) by raising the following grounds of appeal :
ITA NO(s). 2393/Mum/2015 & 2568/Mum/2015, A.Y.2009-10 4 IL&FS Transportation Networks Ltd. Vs Addl.CIT-14(1) & ACIT-14(2)(1) Vs. IL&FS Transportation Networks Ltd.
"1. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in restricting the disallowance of Rs. 7,51,15,797/- computed by the AO u/s. 14A r.w. Rule 8D to Rs. 2,60,29,275/-
2. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in ignoring the decision of the Hon'ble Supreme Court in the case of Goetze India Ltd. (284 ITR 283) while holding that the A.O should have considered appellant's claim.
3. The appellant prays that the order of the CIT(A) on the above ground be set aside and that of the assessing officer be restored.
4. The appellant craves leave to add, amend, vary, omit or substitute any grounds at any time before or at the time of hearing of appeal."
2. Briefly stated, the assessee company which is engaged in the business of a developer, operator and facilitator of surface transportation infrastructure projects had filed its return of income for A.Y. 2009-10 on 30.09.2010, disclosing a total income of Rs. 109,50,86,310/- under the normal provisions, and a „book profit‟ of Rs. 57,18,01,260/- under Sec. 115JB of the I.T. Act. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the I.T. Act.
3. During the course of the assessment proceedings the A.O made a reference under Sec. 92CA(1) of the I.T. Act to the Addl. CIT [Transfer Pricing-1(10)], Mumbai (for short „TPO‟) for computation of the arm‟s length price of the international transactions of the assessee with its Associate Enterprises (for short „AEs‟) during the year under consideration. The TPO observed that the assessee had inter alia carried out the following international transactions with its AEs during the year under consideration:-
Name of the transaction Associated Enterprise A.Y. 2009-10 Method Loan provided by ITNL to ILFS Maritime Offshore 12,426,897/- CUP IMOPL PTE Limited ("IMOPL") ITA NO(s). 2393/Mum/2015 & 2568/Mum/2015, A.Y.2009-10 5 IL&FS Transportation Networks Ltd. Vs Addl.CIT-14(1) & ACIT-14(2)(1) Vs. IL&FS Transportation Networks Ltd.
Loan provided by ITNL to IL&FS International PTE 95,428,967/- CUP
IIPL Limited ("IIPL")
Loan provided by ITNL to Elsamex 6,318,349/- CUP
Elsamex
It was noticed by the TPO that the loans were given by the assessee in USD to its AEs viz. (i) ILFS Maritime Offshore PTE Limited (for short „IMOPL‟); and (ii) IL&FS International PTE Limited (for short „IIPL‟) at an interest rate of USD LIBOR plus 5.5%. Further, loan was given by the assessee in EUROS to its AE viz. Elsamex at an interest rate of EURIBOR plus 1.75%. On a perusal of the transfer pricing study report, it was gathered by the TPO that for the purpose of benchmarking the aforesaid transactions of providing financial assistance to the AEs the assessee had used external CUP derived from the Reuters Loan Connector, Bloomberg and had claimed the interest rate charged to be within the permissible range. The TPO did not accept the geography of the borrower as the determining factor in computing the ALP of the interest rate charged by the assessee. In the backdrop of his aforesaid deliberations the TPO used the „Credit Rating and Information Services of India Ltd.‟ (for short „CRISIL‟) credit rating scale for Financial Year 2008-09 and used the annualized average yield of bonds to determine the CUP of the interest rate to be applied for determination of the ALP. The TPO determined the ALP @15.41%, and worked out the resultant shortfall in charging of interest by the assessee on loans advanced to its AEs at Rs. 11,04,04,539/-, as under :
S.No AE Loan Loan Interest Interest Exposure FOREX Exposure Currency Amount in foreign in foreign [B-A] rate as in INR foreign currency currency per currency as per as per RBI 31 Assessee TPO with March ITA NO(s). 2393/Mum/2015 & 2568/Mum/2015, A.Y.2009-10 6 IL&FS Transportation Networks Ltd. Vs Addl.CIT-14(1) & ACIT-14(2)(1) Vs. IL&FS Transportation Networks Ltd.
[A] rate of 2009
15.41%
[B]
1. Elsamex Euro 9,738,000 104,040 235,426 131,386 67.48 8,865,927
2. IIPL USD 46,500,000 1,926,910 3,682,771 1,755,861 50.95 89,461,118
3. IMPOL USD 6,500,000 267,648 504,694 237,046 50.95 12,077,494
Total 110,404,539
The A.O on the basis of the order passed by the TPO under Sec. 92CA(3) of the I.T. Act, dated 30.01.2013 made an adjustment of Rs. 11,04,04,539/- to the value of the international transactions in his draft assessment order passed under Sec. 144C(1) of the I.T. Act.
4. Still further, it was observed by the A.O that the assessee had in the computation of total income that was filed along with its return of income offered a disallowance of Rs. 7,51,15,797/- under Sec. 14A of the I.T. Act. In the course of the assessment proceedings the assessee by taking support of the CIT(A)‟s order for the earlier years reduced the disallowance to Rs. 2,60,29,275/- on the basis of a revised computation that was filed with the A.O. The A.O observing that the revised claim of the assessee was not on the basis of a revised return of income, thus declined to accept the same. In support of his aforesaid view the A.O relied on the judgment of the Hon‟ble Supreme Court in the case of Goetz (India) Ltd. Vs. CIT (2006) 284 ITR 323 (SC).
5. On the basis of the aforesaid deliberations the A.O passed the assessment order under Sec. 143(3) r.w.s. 144C(5) of the I.T. Act, dated 29.04.2013 and assessed the income under the normal provisions at Rs. 116,90,34,151/- and the „book profit‟ under Sec. 115JB at Rs. 57,18,01,260/-.
6. Aggrieved, the assessee assailed the order of the A.O passed under 143(3), r.w.s. 144C(5) of the I.T. Act before the CIT(A). Insofar ITA NO(s). 2393/Mum/2015 & 2568/Mum/2015, A.Y.2009-10 7 IL&FS Transportation Networks Ltd. Vs Addl.CIT-14(1) & ACIT-14(2)(1) Vs. IL&FS Transportation Networks Ltd.
the TP adjustment of Rs. 11,04,04,539/- in respect of the interest charged on the loans advanced by the assessee to its AEs was concerned, the CIT(A) did not find favour with the contentions advanced by the assessee and observed that the approach adopted and the computation made by the TPO/A.O was found to be correct. The CIT(A) while concluding as hereinabove relied on the order of the ITAT, Mumbai in the case of Aurionpro Solutions Ltd. Vs. ACIT 27 ITR (Tribunal) 276 (Mum). Taking support from the aforesaid order, it was observed by the CIT(A) that the tested party under the Transfer Pricing guidelines was the assessee and not the borrower entity. In the backdrop of his aforesaid conviction, it was observed by the CIT(A) that as the facts relevant to the lender assessee were to be taken into account, therefore, the interest rate that the assessee lender could have expected to earn in a similar transaction carried out with an unrelated party would be the determining factor. It was observed by the CIT(A) that the transfer pricing analysis was to be carried out irrespective of the cost savings of the borrower. The CIT(A) drawing force from the aforesaid order of the Tribunal wherein the interest on bank FDR was adopted as the safest comparable subject to further adjustments after taking into account the risk factors involved in granting the loan to the AEs, thus observed that the TPO had rightly computed the ALP of the interest charged on the amounts advanced to the AEs by using the Bond Yield rates corresponding to the assessee lender and the borrower AEs. On the basis of the aforesaid deliberations the CIT(A) upheld the TP adjustments of Rs. 11,04,04,539/- as regards the determination of the ALP of the interest charged by the assessee on the advances given to its AEs.
7. Insofar the disallowance under Sec. 14A was concerned, it was observed by the CIT(A) that the assessee by relying on the CIT(A)‟s ITA NO(s). 2393/Mum/2015 & 2568/Mum/2015, A.Y.2009-10 8 IL&FS Transportation Networks Ltd. Vs Addl.CIT-14(1) & ACIT-14(2)(1) Vs. IL&FS Transportation Networks Ltd.
order for the earlier years, had by way of a revised computation restricted the disallowance under Sec. 14A to Rs. 2,60,29,275/- as against the disallowance of Rs. 7,51,15,797/- as was offered in its return of income. It was further observed by him that the said reduction of disallowance under Sec. 14A by the assessee was rejected by the A.O. Further, the plea of the assessee before the A.O that in the facts of its case no disallowance at all in terms of Sec. 14A of the I.T. Act was called for was also rejected by the A.O, who while assessing the income retained the disallowance of Rs. 7,51,15,797/- that was initially offered by the assessee in the computation that was filed along with its return of income. The CIT(A) after deliberating on the facts of the case did find favour with the claim of the assessee that no disallowance either under Rule 8D(2)(i) and Rule 8D(2)(ii) of the Income Tax Rules, 1962 was called for in its hands. However, the claim of the assessee that no disallowance under Rule 8D(2)(iii) was liable to be made did not find favour with the CIT(A). It was observed by the CIT(A) that the National Highways Authorities of India (NHAI)/State Government/Authorities that granted the infrastructure projects to the assessee had placed a specific condition that the project being bid by the assessee should only be executed through a separate limited liability company promoted and incorporated by the assessee as the bidder. The concerned Special Purpose Vehicles (SPVs), formed separately for each project by the assessee as the promoter, generated operating income for the assessee by way of receipt of detailed engineering fee, project management fee, margin on construction and margin on operation and maintenance. It was noticed by the CIT(A) that such receipts of the assessee company amounting to Rs. 112.93 crores from such SPVs constituted the major portion of its aggregate income from operations totalling to Rs. 131.36 crores. In the backdrop of the aforesaid facts, it was the claim of the ITA NO(s). 2393/Mum/2015 & 2568/Mum/2015, A.Y.2009-10 9 IL&FS Transportation Networks Ltd. Vs Addl.CIT-14(1) & ACIT-14(2)(1) Vs. IL&FS Transportation Networks Ltd.
assessee that as the aforementioned investments in the form of equity share capital in the concerned SPVs generated taxable income, thus the same could not be said to have been incurred for earning exempt income in the form of dividend. The CIT(A) after deliberating on the aforesaid facts observed that as the formation of the concerned SPVs was integral to the overall operations of the assessee, therefore, the assesses claim that no expenditure was incurred for the formation of these SPVs was not found to be supported by the relevant facts of the case. Rather, it was noticed by the CIT(A) that a portion of the assesses substantial revenue expenses on earning of its operational income would be relatable to the formation and continuation of the SPVs. The CIT(A) was of the view that as the return on investments including dividend that has or shall be issued by such SPVs would be exempt from tax as and when received, therefore, to that extent, some of the indirect expenses would be relatable to the receipt of such exempt income which was to be computed as per Rule 8D(2)(iii). Insofar, reliance was placed by the assessee on the order of the ITAT, Delhi in the case of Oriental Structural Engineers P. Ltd. (ITA 605/2012), it was noticed by the CIT(A) that in the said case 2% of the dividend receipts was retained by the Tribunal as a reasonable disallowance towards administrative expenses viz. management salary, telephone, stationery, postage expenses etc. As regards the reliance that was placed by the assessee on the order of the ITAT, Kolkata in the case of AEI Agro Ltd. (ITA 1331/Kol/2011), it was observed by the CIT(A) that the said order was only in context of the method of computing the average value of investments for the purposes of Rule 8D(2)(iii) and had not given any finding on the disallowance to be made under the said rule. The CIT(A) after deliberating on the facts of the case concluded that disallowance of indirect expenses (other than interest expenditure) was required to be ITA NO(s). 2393/Mum/2015 & 2568/Mum/2015, A.Y.2009-10 10 IL&FS Transportation Networks Ltd. Vs Addl.CIT-14(1) & ACIT-14(2)(1) Vs. IL&FS Transportation Networks Ltd.
made in the manner provided by Rule 8D(2)(iii). On the basis of the average investments of Rs. 377,75,65,939/- the CIT(A) worked out the disallowance under Sec. 14A r.w. Rule 8D(2)(iii) @ 0.5% of the value of such average investments at Rs. 1,88,87,845/-. On the basis of his aforesaid deliberations the CIT(A) partly allowed the contentions that were advanced by the assessee in context of the disallowance made by the A.O under Sec. 14A of the I.T. Act.
8. That both the assessee and the revenue being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. The Learned Authorized Representative (for short „A.R‟) for the assessee at the very outset of the hearing of the appeal submitted that as the assessee had not earned any dividend income during the year under consideration, therefore, the CIT(A) had erred in upholding the disallowance under Sec. 14A r.w. Rule 8D(2)(iii) of Rs. 1,88,87,845/-. In support of his contention that in the absence of any dividend income no disallowance could be made under Sec. 14A of the I.T. Act., the Ld. A.R relied on the order of the Hon‟ble High Court of Delhi in the case of Cheminvest Limited Vs. CIT-VI 378 ITR 33 (Del). It was averred by the Ld. A.R that now when the assessee had not earned any exempt dividend income during the year under consideration, therefore, there was no occasion to relate any part of the expenditure to earning of exempt income and disallow the same under Sec. 14A of the I.T. Act. The Ld. A.R taking us through the aforementioned judgment in the case of Cheminvest Limited (supra) submitted, that it was observed by the Hon‟ble High Court that Sec. 14A will not apply if no exempt income is received or receivable by the assessee during the relevant previous year. Insofar, the TP adjustment of Rs. 11,04,04,539/- made by the A.O/TPO which thereafter had been sustained by the CIT(A) was concerned, it was submitted by the Ld. ITA NO(s). 2393/Mum/2015 & 2568/Mum/2015, A.Y.2009-10 11 IL&FS Transportation Networks Ltd. Vs Addl.CIT-14(1) & ACIT-14(2)(1) Vs. IL&FS Transportation Networks Ltd.
A.R that the lower authorities had erred in failing to appreciate that in the case of loans advanced by an assessee to its AEs the ALP in respect of the interest charged was to be determined on the basis of the rate of interest being charged in the country where the loan is received/consumed. The Ld. A.R in support of his aforesaid contention relied on the judgment of the Hon‟ble High Court of Bombay in the case of Commissioner of Income Tax-2 Vs. Tata Autocomp Systems Ltd. (ITA No. 1320 of 2012; dated 03.02.2015) (copy placed on record). The Ld. A.R drawing force from the aforesaid judgment in the case of Tata Autocomp Systems Ltd (supra) submitted that no infirmity did emerge from the determination of the ALP of the interest charged by the assessee on the loans advanced to its AEs on the basis of the rate of interest that was being charged in the country where the loans were received/consumed by the respective AEs viz. (i) LIBOR + 5.50%; and
(ii) EURIBOR + 1.75%. It was thus submitted by the Ld. A.R that the lower authorities were in error in adopting the Indian rates and therein benchmarking the ALP of the interest charged by the assessee @ 15.41% p.a. by considering the corresponding annualized average yield (%) from CRISIL Ltd. credit rating scale for the year under consideration.
9. Per contra, the Learned Departmental Representative (for short „D.R‟) relied on the order passed by the Tribunal in the assesses own case for the A.Y. 2008-09 and submitted that the matter may be restored to the file of the A.O for determination of the disallowance under Sec. 14A r.w Rule 8D. It was submitted by the Ld. D.R that the CIT(A) had rightly observed that some disallowance under Sec. 14A r.w. Rule 8D(2)(iii) was called for in the hands of the assessee. Insofar, the TP adjustment of Rs. 11,04,04,539/- in respect of the interest expenditure on the amounts advanced by the assessee to its AEs was ITA NO(s). 2393/Mum/2015 & 2568/Mum/2015, A.Y.2009-10 12 IL&FS Transportation Networks Ltd. Vs Addl.CIT-14(1) & ACIT-14(2)(1) Vs. IL&FS Transportation Networks Ltd.
concerned, it was submitted by the Ld. D.R that the judgment of the Hon‟ble High Court of Bombay in the case of Tata Autocomp Systems Ltd. (supra) does not laid down any proposition, as the Hon‟ble High Court had merely declined to take a different view as against that taken by the Tribunal in the case of viz. (i) VVF Ltd. Vs. DCIT (ITA No. 673/Mum/06); and (ii) DCIT Vs. Tech Mahindra Ltd. (46 SOT 141), for the reason that the revenue by not filing any appeal against the aforesaid matters had thus accepted the said decisions of the Tribunal. The Ld. D.R in support of his contention that if the tested party is an Indian party then the conditions of the Indian party will prevail, therein relied on the order of the ITAT, Mumbai in the case of Aurionpro Solutions Ltd. Vs. ACIT [27 ITR (Trib) 276 (Mum)].
10. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record. We shall first advert to the TP adjustment carried out by the A.O/TPO as regards the ALP of the interest charged by the assessee on the amounts advanced to its AEs. The assessee had given loans in USD to its AEs viz. (i) ILFS Maritime Offshore PTE Limited (for short „IMOPL‟); and (ii) IL&FS International PTE Limited (for short „IIPL‟) at an interest rate of USD LIBOR plus 5.5%. Further, loan was given by the assessee in EUROS to its AE viz. Elsamex at an interest rate of EURIBOR plus 1.75%. The assessee had for the purpose of benchmarking the aforesaid transactions used external CUP derived from the Reuters Loan Connector, Bloomberg and claimed the interest rate charged to be within the permissible range. However, the A.O/TPO did not accept the geography of the borrower as the determining factor for computing the ALP of the interest rate charged. The TPO used the CRISIL credit rating scale for Financial Year 2008- 09 and adopted the annualized average yield of bonds of 15.41% to ITA NO(s). 2393/Mum/2015 & 2568/Mum/2015, A.Y.2009-10 13 IL&FS Transportation Networks Ltd. Vs Addl.CIT-14(1) & ACIT-14(2)(1) Vs. IL&FS Transportation Networks Ltd.
determine the CUP of the interest rate to be applied for the determination of the ALP, and resultantly worked out the shortfall in charging of interest by the assessee on loans advanced to its AEs at Rs. 11,04,04,539/-. It is the contention of the Ld. A.R that the lower authorities was in error in benchmarking as per the Indian rates the ALP of the interest charged by the assessee @ 15.41% p.a.
11. We have deliberated at length on the issue under consideration and find that the assessee had provided financial assistance by way of loans in USD/EUROS to its aforementioned AEs viz. (i) IMOPL (USD 6.50 million towards financial assistance by way of loan); (ii) IIPL [(USD 33.5 million towards loan for the purpose of meeting its long term financial requirements & USD 13 million as advance towards share capital which was subsequently converted into a loan during the year]; and (iii) Elsamex (EURO 9,738,000 towards term loan by way of four transfers). We have perused the judgment of the Hon‟ble High Court of Bombay in the case of CIT Vs. Tata Autocomp Systems Ltd. (2015) 374 ITR 516 (Bom) and find that the Hon'ble High Court had dismissed the appeal of the revenue for the reason that as the Tribunal while passing the impugned order had followed the view taken by the coordinate benches of the Tribunal in the case of V.V.F Ltd. Vs. Dy. CIT (ITA No. 673/Mum/2006) and Dy. CIT Vs. Tech Mahindra Ltd. (2011) 12 taxmann.ocm 132 (Mum), and as the said orders were not further carried in appeal by the revenue, therefore, the revenue by allowing the said orders to attain finality, has thus accepted the view therein taken by the Tribunal in the said respective cases. In the backdrop of the fact that the revenue had accepted the decisions of the Tribunal in the case of V.V.F. Ltd. (supra) and Tech Mahindra Ltd. (supra), it was observed by the Hon‟ble High Court that it was not permissible on the part of the revenue to take a different ITA NO(s). 2393/Mum/2015 & 2568/Mum/2015, A.Y.2009-10 14 IL&FS Transportation Networks Ltd. Vs Addl.CIT-14(1) & ACIT-14(2)(1) Vs. IL&FS Transportation Networks Ltd.
view as against the one which had been allowed on its part to attain finality. We find that it was on the basis of the aforesaid observations that the Hon'ble High Court had declined to entertain the appeal filed by the revenue. We however find that the issue as regards the determination of the ALP of the interest charged on loan advanced to AE was looked into by the Hon‟ble High Court of Bombay in the case of CIT-1 Vs. M/s VFS Global Services Pvt. Ltd. (ITA No. 336/Mum/2015, dated 19.01.2017). In the said case the Hon‟ble High Court dealing with the contention of the revenue that the Tribunal was not justified in directing the A.O/TPO to determine the ALP of the interest charged on amounts advanced by considering LIBOR plus 2% as against the rates of the Indian Market, had observed that the view of the Tribunal as regards determination of the ALP of interest charged on amounts advanced to the AE at LIBOR plus 2% appeared to be in conformity with the earlier judgment of the High Court in the case of CIT-2 Vs. Tata Autocomp Systems Ltd. (ITA No. 1320/Mum/2012, dated 03.02.2015). We find that the Hon'ble High Court of Bombay while disposing off the appeal filed by the revenue in the case of CIT-1 Vs. M/s VFS Global Services Pvt. Ltd. (ITA No. 336/Mum/2015, dated 19.07.2017) was not persuaded to be in agreement with the contention of the revenue that the Tribunal was in error in directing the A.O/TPO to determine the ALP of interest charged on loans advanced to AE by considering the LIBOR plus 2% and not the rates of the Indian Market. We further find that a coordinate bench of the Tribunal i.e. ITAT, Pune Bench "B", Pune in the case of Tool Tech Global Engineering Pvt. Ltd. Vs. DCIT had observed that in the case of a transaction in foreign currency between two cross border entities the ALP should be computed in context of the prevailing lending practices in the international market. The Tribunal had further observed that in ITA NO(s). 2393/Mum/2015 & 2568/Mum/2015, A.Y.2009-10 15 IL&FS Transportation Networks Ltd. Vs Addl.CIT-14(1) & ACIT-14(2)(1) Vs. IL&FS Transportation Networks Ltd.
respect of such international transactions, the domestic bank rate would not be a sound basis and rather internationally accepted LIBOR rate would be the proper basis for benchmarking the ALP of the interest rate in respect of the said transactions. We further find that the Hon'ble High Court of Delhi in the case of Commissioner of Income Tax-1 Vs. M/s Cotton Naturals (I) Pvt. Ltd. (ITA No. 233/Mum/2014, dated 27.03.2015) had observed that the interest rate applicable should be that of the currency concerned in which the loan has to be repaid. The Hon'ble High Court had disagreed with the view that the interest rates were to be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party. It was further observed by the High Court that the currency in which the loan is to be repaid normally determined the rate of interest. The aforesaid judgment of the Hon'ble High Court of Delhi in the case of M/s Cotton Naturals (I) Pvt. Ltd. (supra) had thereafter been followed by a coordinate bench of the Tribunal in the case of M/s Firestar International Pvt. Ltd. Vs. ACIT, Mumbai (ITA No. 488/Mum/2015, dated 31.07.2015). The Tribunal by taking support of the aforesaid judgment of the High Court of Delhi had concluded that the application of the State Bank of India PLR of 11.75% for determining the ALP of the interest on loan advanced in USD by the assessee to its AE could not be approved. We have deliberated on the issue under consideration and finding as being in agreement with the view taken in the aforesaid judicial pronouncements, are thus of the considered view that the ALP of the interest charged on the amounts advanced by the assessee to its AEs, viz. (i) ILFS Maritime Offshore PTE Limited; (ii) IL&FS International PTE Limited; and (iii) Elsamex had rightly been benchmarked by the assessee as per LIBOR and EURIBOR rates, and the same could not have been determined as per ITA NO(s). 2393/Mum/2015 & 2568/Mum/2015, A.Y.2009-10 16 IL&FS Transportation Networks Ltd. Vs Addl.CIT-14(1) & ACIT-14(2)(1) Vs. IL&FS Transportation Networks Ltd.
the Indian rate as had been so taken by the A.O/TPO. We thus direct the A.O/TPO to determine the ALP of the interest charged by the assessee on the amounts advanced to its AEs viz. (i) ILFS Maritime Offshore PTE Limited; and (ii) IL&FS International PTE Limited by taking the LIBOR rates as the basis. Insofar, the amount advanced by the assessee to its AE i.e. Elsamex, the A.O shall take the EURIBOR rates as the basis for benchmarking the interest charged by the assessee on the loan advanced to the said AE. The Grounds of Appeal No. 5 to 11 raised by the assessee are allowed in terms of our aforesaid observations.
12. We shall now advert to the issue pertaining to the scaling down of the disallowance under Sec. 14A of Rs. 7,51,15,797/- to an amount of Rs. 1,88,87,845/- by the CIT(A). That both the assessee and the revenue being aggrieved with the order of the CIT(A) has carried the aforesaid issue in appeal before us. On the one hand the revenue is aggrieved with the reduction of disallowance by the CIT(A) to an amount of Rs. 1,88,87,845/-, while for the assessee is aggrieved with the sustaining of the part disallowance under Sec. 14A r.w. Rule 8D(2)(iii) by the CIT(A). The facts pertaining to the issue under consideration lies in a narrow compass. As observed by us hereinabove, the assessee in the computation of income filed along with its return of income had computed the disallowance under Sec. 14A at Rs. 7,51,15,797/-. However, in the course of the assessment proceedings the assessee on the basis of the CIT(A)‟s order for the earlier years filed a revised computation of income with the A.O and restricted the disallowance under Sec. 14A to Rs. 2,60,29,275/-. The revised computation of disallowance under Sec. 14A did not find favour with the A.O who remained under a strong conviction that the said revised claim of disallowance could not be considered in the ITA NO(s). 2393/Mum/2015 & 2568/Mum/2015, A.Y.2009-10 17 IL&FS Transportation Networks Ltd. Vs Addl.CIT-14(1) & ACIT-14(2)(1) Vs. IL&FS Transportation Networks Ltd.
absence of a revised return of income of the assessee. On the basis of his aforesaid conviction, the A.O taking support of the judgment of the Hon‟ble Supreme Court in the case of Goetz (India) Ltd. Vs. CIT (2006) 284 ITR 323 (SC) rejected the claim of the assessee and assessed its income by retaining the disallowance under Sec. 14A at Rs. 7,51,15,797/-.
13. It is contention of the Ld. A.R before us that in the absence of any exempt dividend income no disallowance could have been validly made under Sec. 14A in the hands of the assessee. We have given a thoughtful consideration to the issue before us and are in agreement with the view of the A.O that in terms of the ratio of the decision of the Hon‟ble Supreme Court in the case of Goetz (India) Ltd. (supra), the A.O was not vested with any jurisdiction to have allowed the revised claim of disallowance under Sec. 14A that was raised by the assessee on the basis of a revised computation of income in the course of the assessment proceedings. However, such restriction on entertaining a claim not raised by an assessee in its return of income, as observed by the Hon‟ble Supreme Court in the case of Goetz (India) Ltd. (supra), is not applicable to the appellate authorities. Rather, the Hon‟ble High Court of Bombay in the case of Commissioner of Income-Tax Vs. Pruthvi Brokers & Shareholders (P) Ltd (2012) 349 ITR 336 (Bom) had observed that an assessee without filing of a revised return of income is vested with a right to raise a fresh claim before the appellate authorities. We thus are of the considered view that in the backdrop of the aforesaid settled position of law the assessee remained at a liberty to assail the disallowance made under Sec. 14A, as long as such claim was based on the facts available on record.
ITA NO(s). 2393/Mum/2015 & 2568/Mum/2015, A.Y.2009-10 18 IL&FS Transportation Networks Ltd. Vs Addl.CIT-14(1) & ACIT-14(2)(1) Vs. IL&FS Transportation Networks Ltd.
14. We shall now advert to validity of the disallowance under Sec. 14A r.w. Rule 8D(2)(iii) of Rs. 1,88,87,845/- as had been sustained by the CIT(A). The CIT(A) taking the average investments at Rs. 377,75,65,939/- had disallowed 0.5% of the same and had worked out the disallowance under Sec. 14A r.w. Rule 8D(2)(iii) at Rs. 1,88,87,845/-. The CIT(A) had though vacated the disallowances made by the A.O under Rule 8D(2)(i) and Rule 8D(2)(ii), but had upheld the disallowance in terms of Rule 8D(2)(iii) r.w. Sec 14A amounting to Rs. 1,88,87,845/-. The Ld. A.R had for the very first time raised a plea before us, that as no dividend income was either received or receivable by the assessee during the year under consideration, therefore, no disallowance was called for under Sec. 14A. We find substantial force in the contention of the Ld. A.R that the disallowance of expenditure under Sec. 14A has to be worked out in the backdrop of the exempt income of the assessee. Our aforesaid view is fortified by the judgment of the Hon‟ble High Court of Delhi in the case of Joint Investment Pvt. Ltd. Vs. CIT (2015) 372 ITR 694 (Del). Further, a „Special Bench‟ of the ITAT, Delhi in the case of ACIT Vs. Vireet Investment (P) Ltd. (2017) 82 Taxmann.com 415 (Delhi-Trib) (SB) has held that disallowance under Sec. 14A r.w. Rule 8D(2)(iii) shall be computed only on those investments which had yielded tax free income during the year. Apart therefrom, the Hon‟ble High Court of Delhi in the case of Cheminvest Ltd. Vs. CIT 378 ITR 33 (Del) has held that section 14A will not apply if no exempt income is received or receivable by the assessee during the year. We find that the Hon‟ble High Court of Bombay in the case of Pr.CIT Vs. M/s Ballapur Industries Ltd. (ITA No. 51 of 2016; dated 13.10.2016) while rejecting the appeal of the revenue and holding that no substantial question of law did arise therefrom, has held as under :
ITA NO(s). 2393/Mum/2015 & 2568/Mum/2015, A.Y.2009-10 19 IL&FS Transportation Networks Ltd. Vs Addl.CIT-14(1) & ACIT-14(2)(1) Vs. IL&FS Transportation Networks Ltd.
"On hearing the Ld. Counsel for the department and on a perusal of the impugned orders, it appears that both the authorities have recorded a clear finding of fact that there was no exempt income earned by the assessee. While holding so, the authorities relied on the judgment of the Delhi High Court in Income Tax Appeal No. 749/2014, which holds that the expression "does not form part of the total income" in Section 14A of the Income Tax Act, 1961 envisages that there should be an actual receipt of the income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. The Income Tax Appellate Tribunal held that the provisions of Section 14A of the Income Tax Act, 1961 would not apply to the facts of this case as no exempt income was received or receivable during the relevant previous year. It is not the case of the Assessing Officer that any actual income was received by the assessee and the same was includible in the total income. In the facts of the case, the Authorities held that since the investments made by the assessee in the sister concerns were not the actual income received by the assessee, they could not have been included in the total income. The findings of facts recorded by both the authorities do not give rise to any substantial question of law. Since no substantial question of law arises in this Income Tax Appeal, the Income Tax Appeal is dismissed with no order as to costs."
We thus in terms of our aforesaid observations respectfully following the decision of the Hon‟ble High Court of Bombay, are thus persuaded to subscribe to the claim of the Ld. A.R that no disallowance under Sec. 14A is liable to be made if no exempt income is received or receivable by the assessee during the relevant previous year. On the basis of our aforesaid observations we restore the issue to the file of the A.O for readjudicating the issue pertaining to disallowance under Sec. 14A in the hands of the assessee, in terms of our aforesaid observations. Needless to say, the A.O shall during the course of the set aside proceedings afford a reasonable opportunity of being heard to the assessee, who shall remain at a liberty to substantiate its claim that no disallowance under Sec. 14A was liable to be made in its hands. The Grounds of Appeal No. 1 to 4 raised by the assessee are allowed for statistical purposes in terms of our aforesaid observations. The Grounds of Appeal No. 1 and 2 raised by the revenue are dismissed.
ITA NO(s). 2393/Mum/2015 & 2568/Mum/2015, A.Y.2009-10 20 IL&FS Transportation Networks Ltd. Vs Addl.CIT-14(1) & ACIT-14(2)(1) Vs. IL&FS Transportation Networks Ltd.
15. The appeal of the assessee is allowed in terms of our aforesaid observations and the appeal of the revenue is dismissed.
Order pronounced in the open court on 19/12/2018
Sd/- Sd/-
(G. Manjunatha) (Ravish Sood)
ACCOUNTANT MEMBER JUDICIAL MEMBER
भुंफई Mumbai; ददनांक 19.12.2018
Ps. Rohit Kumar
आदे श की प्रनिलऱपि अग्रेपषि/Copy of the Order forwarded to :
1. अऩीराथी / The Appellant
2. प्रत्मथी / The Respondent.
3. आमकय आमुक्त(अऩीर) / The CIT(A)-
4. आमकय आमक् ु त / CIT
5. ववबागीम प्रतततनधध, आमकय अऩीरीम अधधकयण, भुंफई / DR, ITAT, Mumbai
6. गार्ड पाईर / Guard file.
सत्मावऩत प्रतत //True Copy// आदे शधिुसधर/ BY ORDER, उि/सहधयक िंजीकधर (Dy./Asstt. Registrar) आयकर अिीऱीय अधर्करण, भुंफई / ITAT, Mumbai ITA NO(s). 2393/Mum/2015 & 2568/Mum/2015, A.Y.2009-10 21 IL&FS Transportation Networks Ltd. Vs Addl.CIT-14(1) & ACIT-14(2)(1) Vs. IL&FS Transportation Networks Ltd.