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Gujarat High Court

Principal Commissoner Of Income Tax, ... vs Jyoti Cnc Automation Pvt Ltd on 2 July, 2018

Author: M.R. Shah

Bench: M.R. Shah, A.Y. Kogje

C/TAXAP/687/2018                                                            ORDER



  IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
                        R/TAX APPEAL NO. 687 of 2018
=============================================
            PRINCIPAL COMMISSONER OF INCOME TAX, RAJKOT­1
                                 Versus
                     JYOTI CNC AUTOMATION PVT LTD
=============================================
Appearance:
MR MANISH BHATT, SR. ADVOCATE with MRS MAUNA M BHATT(174) for
the PETITIONER(s) No. 1
 for the RESPONDENT(s) No. 1
=============================================
 CORAM: HONOURABLE MR.JUSTICE M.R. SHAH
        and
        HONOURABLE MR.JUSTICE A.Y. KOGJE

                              Date : 02/07/2018

                                ORAL ORDER

(PER : HONOURABLE MR.JUSTICE M.R. SHAH) [1.0] Feeling aggrieved and dissatisfied with the impugned judgment and order passed by the learned Income Tax Appellate Tribunal, Rajkot Bench, Rajkot (hereinafter referred to as "learned ITAT") in ITR No.301/RJT/2015 for AY 2010­11, the Revenue has preferred the present Tax Appeals with the following proposed questions of law.

"[A] Whether the Appellate Tribunal has substantially erred in law in restricting the arms length interest rate on loan from 4.31% to 2.40% for loan given to Associated Enterprise?

[B] Whether the Appellate Tribunal has substantially erred in law in deleting the addition of Rs.3,01,66,650/­ being Arms length price on corporate guarantee?"

[2.0] So far as proposed question No.2[B] is concerned, the same is under consideration by this Court in Tax Appeal No.567/2016. Hence, present Tax Appeal is admitted qua question No.2[B].

C/TAXAP/687/2018 ORDER [3.0] Now, so far as proposed question No.2[A] viz. Whether the Appellate Tribunal has substantially erred in law in restricting the arms length interest rate on loan from 4.31% to 2.40% for loan given to Associated Enterprise is concerned, at the outset it is required to be noted that while restricting the arms length interest rate at 2.40%, the learned CIT(A) held in favour of the assessee by observing in para 4.3 which has been reproduced and considered by the learned ITAT while passing the impugned order.

"4.3 I have carefully considered the findings of the Assessing Officer in his assessment order and the submission of the Appellate Company.

At the first instance, I do not accept the Appellant's contention regarding the Quasi Equity and Commercial expediency relying upon the decision of the Mumbai Tribunal in the case of Tata Autocomp Systems Limited (ITA No.7354/Mum/11) wherein it was held that the, "Interest free loan is subject to arm's length test irrespective of commercial expediency".

The Appellant Company has also contended that requisite approval of the Reserve Bank of India (RBI) was obtained and RBI while giving approval keeps in mind all the provisions of law further RBI has accepts the remittance as in the form of Quasi Capital Therefore no interest need to be computed for the purpose of the Income Tax Act, 1961 however same view is not acceptable because permission is given by the RBI is for totally different purpose. The RBI is only concerned with foreign exchange and they would look matter from different point of view. However, what is the Arms length price (ALP) of loan advanced to Associated Enterprise is need to be decided considering the facts and circumstances of the case. In present case since Associated Enterprise is situated in France it is most appropriate to consider mark up on the basis of average speed over LIBOR charged in France rather than adopting mark up on the basis of average spread over LIBOR charged in whole European region. The average spread charged in France out of analysis carried out by TPO himself is 163 basis point as compared to 273 basis point of whole Europe. The spread over LIBOR would depend on various economic factors of each and every country coming in European region. Further the argument of the appellant company regarding considering internal cup of IDBI bank wherein bank has charged interest @ LIBOR + 100 basis points is not tenable as the transactions does not compare on the matrix of geography as well Page 2 of 4 Downloaded on : Mon Jun 15 09:56:12 IST 2020 C/TAXAP/687/2018 ORDER as end use of fund i.e. IDBI borrowing is to finance the working capital whereas the transaction in question is for acquisition of foreign business. Therefore, it would not result in determining an ALP under Comparable Uncontrolled Price (CUP) Method. In order to determine ALP under CUP method, comparison should be made between transactions in same region having same economic factors. As the Company to which loan has been granted by the Appellant Company is situated in France, comparison should be made with other Companies situated in France only and not whole Europe, Therefore, I reduce the spread charge over Europe from 273 basis point of whole Europe to 163 basis point of France.

Further, TPO has also added 100 basis point towards foreign exchange risk coverage. Foreign Exchange risk is normal in every business which carries out transactions with parties outside India. The currency may fluctuate both ways i.e. it may increase / decrease resulting in loss / gain to the Appellant Company. No party factors foreign exchange risk assumed by him all the time of entering into any International Transactions and no separate charges are recovered for the same. This is due to the fact that if the currency fluctuates and profit is earned by the Appellant Company, it would not, pass on the profit to other party.

Hence, I direct the Assessing Officer to determine the Arm's Length interest by considering the EURO LIBOR plus mark up @ 163 basis point on the interest free loan which shall work out @ 5.75%. The assessee gets the relief accordingly."

[3.1] The learned ITAT has concurred with the aforesaid. On going through the finding recorded by the learned CIT(A) confirmed by the learned ITAT and considering the fact that the Associated Enterprise was situated in France and therefore, the assessee considered the markup on the basis of the average spread over LIBOR charged in whole European region. The learned CIT(A) as well as the learned ITAT has also considered the submission on behalf of the Revenue that even the condition prevailing in the country was required to be considered as the same has also been dealt with and considered for which necessary observations are made in para 4.3 itself. We are in complete agreement with the Page 3 of 4 Downloaded on : Mon Jun 15 09:56:12 IST 2020 C/TAXAP/687/2018 ORDER view taken by the learned ITAT. No substantial question of law arise so far as the proposed question No.2[A] is concerned. Hence, present Tax Appeal qua proposed question No.2[A] stands dismissed.

[4.0] As observed hereinabove, present Tax Appeal qua question No.2[B] as above is ADMITTED. To be heard with Tax Appeal No.678/2018.

(M.R. SHAH, J.) (A.Y. KOGJE, J.) Ajay** Page 4 of 4 Downloaded on : Mon Jun 15 09:56:12 IST 2020