Income Tax Appellate Tribunal - Pune
Goodyear South Asia Tyres Pvt.Ltd.,, ... vs Assessee on 28 November, 2014
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "B", PUNE
BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER
AND SHRI R.S. PADVEKAR, JUDICIAL MEMBER
ITA No.1431/PN/2010
(Assessment Year : 2006-07)
Goodyear South Asia Tyres Pvt. Ltd.,
H-18, MIDC Area, Waluj, Aurangabad.
PAN : AABCG5544P .... Appellant
Vs.
Asstt. Commissioner of Income Tax,
Circle-1, Aurangabad. .... Respondent
ITA Nos.1868 & 1869/PN/2012
(Asst. Yrs : 2005-06 & 2007-08)
Goodyear South Asia Tyres Pvt. Ltd.,
H-18, MIDC Area, Waluj, Aurangabad.
PAN : AABCG5544P .... Appellant
Vs.
Asstt. Commissioner of Income Tax,
Circle-1, Aurangabad. .... Respondent
ITA Nos.1882 & 1883/PN/2012
(Asst. Yrs : 2005-06 & 2007-08)
Asstt. Commissioner of Income Tax,
Circle-1, Aurangabad. .... Appellant
Vs.
Goodyear South Asia Tyres Pvt. Ltd.,
H-18, MIDC Area, Waluj, Aurangabad.
PAN : AABCG5544P .... Respondent
Assessee by : Mr. Neeraj Jain &
Mr. Abhishek Agarwal
Department by : Mr. Mazhar Akram
Date of hearing : 20-10-2014
Date of pronouncement : 28-11-2014
ORDER
PER G. S. PANNU, AM
The captioned five appeals relate to the same assessee and as certain common issues are involved the appeals have been clubbed and heard 2 ITA No.1891/PN/2013 ITA No.1970/PN/2013 A.Y. 2005-06 together and a consolidated order is being passed for the sake of convenience and brevity.
2. In the three appeals preferred by the assessee pertaining to assessment years 2005-06, 2006-07 and 2007-08 which are directed against the respective orders of the CIT(A), Aurangabad dated 30.07.2012, one of the issues which is common, relates to addition made by the Assessing Officer on account of transfer pricing adjustment while determining the arm's length price of the expenditure incurred by way of interest on loans raised from the associated enterprises. It was a common point between the parties that assessee's appeal for the assessment year 2006-07 vide ITA No.1431/PN/2010 be taken as the lead case in order to appreciate the controversy. Accordingly, the appeal for assessment year 2006-07 was heard as the lead case.
3. ITA No.1431/PN/2010 is directed against the order of the Asstt. Commissioner of Income Tax, Circle- 1, Aurangabad (in short 'the Assessing Officer') passed u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (in short "the Act") dated 14.10.2010, which is in conformity with the directions given by the Dispute Resolution Panel- 1, Mumbai (in short 'the DRP') dated 27.09.2010. In this appeal the various Grounds of Appeal raised by the assessee read as under :-
"1. That the assessing officer erred on facts and in law in completing the assessment under section 143(3) read with section 144(C) of the Income-tax Act, 1961 ("the Act") by enhancing the total income of the appellant (before set off of brought forward losses and depreciation) by Rs.73,64,368/-
2. That the Assessing Officer/Transfer Pricing Officer ("AO/TPO") erred on facts and in law in making addition to the income of the appellant to the extent of Rs.66,04,445/- on account of the alleged difference in the arm's length price of the international transactions undertaken by the appellant. 2.1 That the AO/TPO erred on facts and in law in disregarding the methodology applied by the appellant for benchmarking the international transaction of payment of interest on Technical Know How Fees loan and proposing an adjustment of Rs. 19,02,919/- to the income of the appellant.3 ITA No.1891/PN/2013 ITA No.1970/PN/2013
A.Y. 2005-06 2.2 That the learned AO/TPO erred on facts and in law in comparing the interest rate charged by the associated enterprise for Technical Know How Fees loan with the interest rate prescribed by Reserve Bank of India ("RBI") for External Commercial Borrowing ("ECB") for the assessment year 2006-07. 2.3 That the learned AO/TPO erred on facts and in law in not appreciating that the Technical Know How Fees Loan was strictly to support the business of the appellant in the initial period of its set-up & the payment was deferred for a period of 9 years (initially for 7 years and subsequently for 7 years) without interest.
2.4 That the learned AO/TPO erred on facts and in law in disregarding the methodology adopted by the appellant for benchmarking the international transaction of payment of interest on Foreign Currency Cash Loan and proposing an adjustment of Rs. 33,06,854/- to the income of the appellant. 2.5 That the learned AO/TPO erred on facts and in law in comparing the interest rate charged by the associated enterprise for foreign currency cash loan with the interest rate prescribed by Reserve Bank of India ("RBI") for External Commercial Borrowing ("ECB") for the assessment year 2006-07. 2.6 That the learned AO/TPO erred on facts and in law in disregarding the methodology adopted by the appellant for benchmarking the international transaction of payment of interest on ECB and proposing an adjustment of Rs.13,94,672/- to the income of the appellant.
2.7 That the learned AO/TPO erred on facts and in law in comparing the interest rate charged by the associated enterprise for the ECB with the interest rate LIBOR plus 2% prescribed by the RBI for ECB for the year 2006-07 as against the interest rate of LIBOR plus 3% notified by RBI for the year 2003- 04, i.e. at the time when ECB Loan was obtained.
2.8 That the learned AO/TPO erred on facts and in law in not appreciating that the interest on ECB charged by the AE from the appellant is same or less than the actual cost of borrowings in the hands of the AE. 2.9 That the learned AO/TPO erred on facts and in law in not appreciating that the loan transactions between the appellant and its AE was genuine and entered into as a result of commercial expediency.
2.10 Without prejudice that the learned AO/TPO erred on facts and in law in not holding that +/(-)5% variation from the arm's length interest should have been allowed to the appellant under the provision of section 92C(2) of the Act.
3. That the AO erred on facts and in law in disallowing the depreciation amounting to Rs.7,59,723 claimed by the appellant on assets forming part of block of assets not used during the relevant previous year. 3.1 That the AO erred on facts and in law in not appreciating that the expression "used for the purpose of business" as mentioned in section 32(1) of the Act, refers to the entire block of asset and not the individual assets forming part of the block of assets."
4. In brief, the relevant facts are that assessee is a company incorporated under the provisions of the Companies Act, 1956 and is, inter-alia, engaged in the business of manufacture and sale of automotive tyres, tubes, flaps, etc. at its factory located at Aurangabad. For the assessment year 2006-07, it filed a 4 ITA No.1891/PN/2013 ITA No.1970/PN/2013 A.Y. 2005-06 return of income declaring 'Nil' income. The said return was subject to a scrutiny assessment u/s 143(3) r.w.s. 144C(13) of the Act by the Assessing Officer dated 14.10.2010 wherein the total income has been determined at 'Nil'. However, two additions have been made - firstly, a sum of Rs.66,04,445/- on account of a transfer pricing adjustment; and secondly, a sum of Rs.7,59,723/- on account of disallowance of depreciation, thus, totaling to Rs.73,64,368/-. The income so determined was set-off against the brought forward business loss for assessment year 1998-99 and ultimately the total income was determined at 'Nil'. However, both the additions made by the Assessing Officer have been challenged by the assessee in the appeal before us.
5. Although, assessee has raised multiple Grounds of Appeal but the essentially the grievance is on account of the aforesaid two additions made by the Assessing officer. The first substantive dispute is with regard to an addition of Rs.66,04,445/- made by the Assessing Officer on account of transfer pricing adjustment.
6. The facts leading up to the addition on account of transfer pricing adjustment can be summarized as follows. The Assessing Officer noticed that the assessee company had entered into various international transactions with its associated enterprises whose income was liable to be computed having regard to their arm's length price in terms of the provisions of section 92(1) of the Act. Accordingly, the Assessing Officer referred the matter to the Transfer Pricing Officer (TPO) u/s 92CA(1) of the Act for computation of arm's length price of the international transactions entered by the assessee with its associated enterprises. The TPO noted that various international transactions with associated enterprises were entered by the assessee, viz., term loan repayment, import of raw material/capital goods/spares, expenses reimbursed/recovered to/from an associated enterprise, interest on term loan, 5 ITA No.1891/PN/2013 ITA No.1970/PN/2013 A.Y. 2005-06 etc.. The TPO, after allowing the requisite opportunities to the assessee, passed an order u/s 92CA(3) of the Act dated 08.10.2009 determining the arm's length price of international transactions, whereby he has proposed an adjustment of Rs.66,04,445/- in respect of the international transactions of interest paid on loans raised from the associated enterprises. All other international transactions entered by the assessee with its associated enterprises have been accepted by the TPO to be at arm's length price. In this view of the matter, we confine our further discussion only in respect of the transaction of payment of interest on loans raised from associated enterprises, which is the international transaction in dispute before us.
7. The appellant company has incurred interest expenditure of Rs.2,96,25,682/- in respect of three kinds of foreign currency cash loans raised from Goodyear Tyre and Rubber Co., an associated enterprise based in USA. Firstly, assessee had raised a technical knowhow loan in the past years which carried rate of interest of 12% per annum; secondly, assessee raised a foreign currency cash loan against import of capital goods in the past years which carried interest @ 12% per annum; thirdly, a loan by way of External Commercial Borrowing (ECB) was raised from the associated enterprise in the past years, for financing its working capital needs, which carried rate of interest of LIBOR plus 3%. The TPO compared the international transaction of the payment of interest on the aforesaid loans with the ceiling prescribed by the Reserve Bank of India (RBI) for payment of interest on ECB loans for the previous year under consideration, which stood at LIBOR plus 2% i.e. 5.46. By comparing the aforesaid RBI mandated interest rate on ECB loans i.e. 5.46% with the rate of interest incurred by the assessee, an adjustment of Rs.66,04,445/- was made so as to determine the arm's length price on account of the payment of interest which is detailed as under :- 6 ITA No.1891/PN/2013 ITA No.1970/PN/2013
A.Y. 2005-06 Loan Rate of interest Interest paid Interest Difference paid by the by appellant computed by (Adjustment) Appellant (Rs.) TPO (LIBOR+200bps) Technical 12% p.a. 34,91,594 15,88,675 19,02,919 knowhow loan Foreign currency 12% p.a. 55,03,780 21,96,926 33,06,854 cash loan ECB Loan LIBOR plus 3% 2,06,30,308 1,92,35,636 13,94,672 Total Adjustment 66,04,445
8. The aforesaid stand of the TPO has been affirmed by the Dispute Resolution Panel (DRP) vide order dated 27.09.2010 in response to objections raised by the assessee to the adjustment proposed by the Assessing Officer on the above lines in the draft assessment order u/s 143(3) r.w.s. 144C(1) of the Act dated 23.12.2009.
9. In the above background, rival parties have made their submissions.
The appellant company has furnished voluminous Paper Books and on behalf of the Revenue arguments have been advanced, along with written submissions by the TPO have also been placed on record. The rival submissions have been heard and the relevant material perused in order to dispose of the dispute.
10. The Ld. Representative for the assessee extensively argued that the addition made by the Assessing Officer on account of transfer pricing adjustment is not sustainable. At the outset, the Ld. Representative submitted that the terms and conditions of the loans raised from the associated enterprises have been approved by the Government of India viz. the Department of Economic Affairs, (Ministry of Finance) and Reserve Bank of India. It has been pointed out that the Reserve Bank of India has specifically approved the rate of interest in respect of technical knowhow loan as well as the foreign currency cash loan by taking into consideration the then prevailing rate of interest and also considering the facts and circumstances surrounding the loans obtained by the assessee. In the context of the technical knowhow 7 ITA No.1891/PN/2013 ITA No.1970/PN/2013 A.Y. 2005-06 loan and foreign currency cash loan obtained by the assessee, it was pointed out that there was a moratorium of payment on interest for initial seven years, which was, however, extended for next two years, and the Reserve Bank of India approved the rate of interest of 12% for the period starting after the end of such nine years. The Ld. Representative pointed out that the aforesaid terms of the loan are specifically approved by the Reserve Bank of India and therefore it would be inappropriate for the TPO, which is another wing of the Government, to say that the payment of interest by the assessee to the associated enterprise is not an arm's length price. The point made by the assessee is that the arm's length price of the transaction of interest paid by the assessee in the present case cannot be considered de-hors the factum of the Central Government having approved the terms and the rate of payment of interest. In this context, he has relied on the parity of reasoning upheld by the Tribunal in the following decisions : (i) Abhishek Auto Industries Ltd. Vs. DCIT (ITA No.1433/Del/2009 dated 12.11.2010); (ii) DCIT vs. Sona Okegawa Precision Forgings Ltd. (ITA No.5386/Del/2010 dated 16.12.2011); (iii) M/s Cadbury India Ltd. vs. Addl.CIT (ITA No.7408/Mum/2010 dated 13.11.2013);
(iv) Lumax Industries Ltd. vs. ACIT (ITA No.4456/Del/2012 dated 31.05.2012);
(v) M/s Here Motocorp Ltd. vs. Addl.CIT (ITA No.5130/Del/2010 dated 23.11.2012); and, (vi) M/s ThyssenKrupp Industries India Pvt. Ltd. vs. Addl.CIT (ITA No.6460/Mum/2012 dated 27.02.2013).
11. Apart therefrom, it has also been submitted that the adjustment made by the TPO by comparing the specific rate of interest approved by the RBI for technical knowhow loan and foreign currency cash loan available by the assessee with a general rate prescribed by the RBI in respect of ECB loans is wrong because it is fallacious to apply the general rates approved by RBI in preference to the specific rate approved by the RBI for the instant two loans in the case of the assessee. On this count also it has been asserted that the approach of the TPO is unjustified.
8 ITA No.1891/PN/2013ITA No.1970/PN/2013
A.Y. 2005-06
12. Furthermore, it is pointed out that the TPO has wrongly adopted the rate of interest computed at LIBOR plus 2% because such a rate of interest is applicable for ECBs having a maturity period of three to five years. In this context, it has been pointed out that the arm's length price of the interest payable by the assessee on technical knowhow loan and foreign currency cash loan have been computed by the TPO corresponding to the ceiling rate for the ECB loans prescribed by the RBI at LIBOR plus 200bps i.e. 5.46% (3.46% + 2%). By referring to the relevant RBI Circular 60 dated 31.01.2004, a copy of which has been placed in the Paper Book, it is submitted that the same is in relation to loans having maturity period of three to five years. It is further pointed out that the said Circular issued by the RBI provides the ceiling of interest rate of LIBOR plus 3.5% in respect of ECBs having maturity period of more than five years. The Ld. Representative pointed out the tenure of all the three loans obtained by the assessee from its associated enterprise is more than five years, namely, Technical knowhow loan - 12 years; Foreign currency cash loan - 14 years; and, ECB Loan - 4 years. It is submitted that without conceding to the stand of the TPO, even if the ceiling of interest payable on ECB loans prescribed by the RBI for loans having maturity period of more than five years is adopted, the effective interest paid by the assessee would be lower, and even on this basis, no adjustment would survive in relation to payment of interest on technical knowhow loan and foreign currency cash loans.
13. A pertinent issue has been raised by the assessee, which is with respect to the stand of the TPO that the expenditure of interest paid by the assessee during the year is to be benchmarked on a standalone basis by disregarding the fact that there was an initial moratorium period of 9 years during which no interest was payable and that the 12% rate of interest was payable only for the post-moratorium period. It is submitted that if the effective rate of loan was computed considering the period for which loan has been 9 ITA No.1891/PN/2013 ITA No.1970/PN/2013 A.Y. 2005-06 availed by the assessee, rate of interest would work out much lower than the benchmark considered by the TPO. In this context, the assessee company has calculated the effective rate of interest on a standalone basis by considering the loan outstanding during the year and the period for which it has been availed by the assessee, i.e. including the period of moratorium when no interest was payable. It is submitted that the effective rate of interest works out to be lesser than arm's length rate determined by the TPO. The details in this regard are as under :-
Technical knowhow loan FCC loan
Particulars Year ending Year ending Year ending
March, 05 March, 06 March, 06
Interest paid 8066927 3491595 5503760
Amount of loan outstanding 223691325 210246455 243824000
Effective rate of interest 3.60% 1.66% 2.26%
14. It was therefore contended that even on this count adjustment proposed by the TPO is uncalled for.
15. On the other hand, the Ld. Departmental Representative appearing for the Revenue has contended that the income-tax authorities made no mistake in determining the arm's length price of the transaction of payment of interest to associated enterprise based on the rate prescribed by RBI for the ECB loans. The Ld. Departmental Representative pointed out that assessee has paid 12% rate of interest on its technical knowhow and foreign currency cash loans, which was higher than the rate prescribed by the RBI for ECB loans and therefore the payment of interest was more than the arm's length price. Similarly, it was pointed out that on the ECB loans, assessee has paid rate of interest equivalent to LIBOR plus 3% whereas the rate of interest on ECBs prescribed by the RBI during the year under consideration was LBIOR plus 2%. In this manner, the order passed by the lower authorities is sought to be justified.
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16. We have carefully considered the rival submissions. Before proceeding to adjudicate the rival stands, it would be appropriate to briefly touch-upon the manner in which the impugned liability towards interest on loans raised from associated enterprises has been incurred by the assessee. Pertinently, the loans in question, namely, Technical knowhow loan, Foreign currency cash loan and ECB loan have been availed by the assessee from Goodyear Tyre and Rubber Co. an associated enterprise based in USA. Assessee has made a payment of interest of Rs.2,96,25,682/- in respect of the aforesaid three loans. Regarding the technical knowhow loan, the details are that the assessee company entered into a technical assistance and license agreement with its associated enterprise on 21.06.1994 for provision of technical assistance in manufacturing of Earthmover tyres, Radial tyres, Radial passenger tyres, etc.. In terms of the said agreement, assessee was required to pay a lump sum technical knowhow fee of USD one crore. The said agreement was subsequently amended vide a supplementary agreement dated 01.10.2003, whereby the agreed amount of technical knowhow fee payable to Goodyear USA was reduced to USD 67,50,000/-. On 11th July, 1996 assessee entered into an agreement with the associated enterprise in terms of which the technical knowhow fee payable was converted into a loan which was initially interest-free for the first seven years period and was thereafter re-payable in three branches carrying interest @ 12% per annum. Consequent to the modification of the technical assistance agreement done on 01.10.2003, the loan agreement was also modified by an agreement dated 02.10.2003 whereby the principal amount of loan was reduced from USD one crore to USD 67,50,000/-. The loan agreement dated 11.07.1996 was approved by the Reserve Bank of India vide letter dated 17.04.1996, which was subsequently amended vide RBI letter dated 10.06.2003 reducing the principal amount of loan from USD one crore to USD 67,50,000/-. Copies of such approvals have been placed in the Paper Book at pages 469 - 473. In terms of the RBI approvals, it transpires that the technical knowhow loan was 11 ITA No.1891/PN/2013 ITA No.1970/PN/2013 A.Y. 2005-06 interest free for initial period of seven years from the date on which technical knowhow fee was payable and at the end of the seven years the loan was repayable in five equal installments together with interest @ 12% per annum. Notably, such interest was payable for the period after the moratorium period of seven years. The RBI approval also permits that during the seven years moratorium period, the loan amount was to be increased by 5% of the principal amount to account for the foreign exchange risk coverage. The aforesaid increase on account of foreign exchange risk coverage was not applicable after the close of seven year's moratorium period. Subsequently, RBI also extended the period of moratorium for payment of interest by two years, but in this extended period of moratorium no further increase on account of exchange rate fluctuation was allowed. All these features of the technical knowhow loan are emerging from the material on record and in-fact the same are not in dispute.
17. Now, with regard to the foreign currency cash loan, the details are as follows. On 16.08.1995 assessee entered into a foreign currency cash loan agreement with its associated enterprise, namely, Goodyear Tyre and Rubber Co., USA for USD 56,00,000 for the purpose of financing import of capital goods. The said agreement was also approved by the Reserve Bank of India vide communication dated 27.09.1995, a copy of which has been placed in the Paper Book at page 393. In terms of the said approval by the Reserve Bank of India, it is prescribed that the loan shall remain interest-free for a period of seven years from the date of grant of loan and at the end of the seven years it shall be repaid in five equal installments together with interest @ 12%. A perusal of the RBI approval reveals that other terms and conditions in respect of above foreign currency cash loan are similar to those prescribed for technical knowhow loan, which we have succinctly enumerated in the earlier paras.
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18. Thirdly, the ECB loan raised by the assessee from its associated enterprise, namely, Goodyear Tyre and Rubber Co., USA is of a sum of USD 90,00,000. The said loan has been raised vide an agreement dated 12.09.2003 and such financing is to meet the working capital requirements. In terms of the said agreement, a copy of which has been placed in the Paper Book at page 438, the borrowing is repayable in three installments by 15.03.2006, 31.12.2006 and 31.12.2007. The ECB loan was availed by the assessee at the interest rate of LIBOR plus 3% as notified by the RBI in its Circular No.36 dated 14.11.2003, which was prevailing when the assessee raised such ECB loan.
19. In the background of the aforesaid terms and conditions of the loans raised from the associated enterprise, assessee paid interest aggregating to Rs.2,96,25,683/- to its associated enterprises. The assessee benchmarked the aforesaid transaction of payment of interest by applying Comparable Uncontrolled Price (CUP) method as the most appropriate method and thus justified that the aforesaid payment of interest was at an arm's length price. The stand of the assessee was that interest charged on technical knowhow loan and foreign currency cash loan @ 12% was lower than the Prime Lending Rate (PLR) of interest charged by the State Bank of India at the relevant point of time, i.e. 12.25% - 13.25%. Assessee also justified the rate of interest on the ground that technical knowhow and foreign currency loans were specifically approved by the RBI wherein the rate of interest payable was also prescribed. Even with regard to the ECB loan availed, it was contended that the same was in accordance with guidelines and the interest rate ceiling prescribed by the RBI at the time of obtaining such loan. The aforesaid submissions of the assessee have not found favour with the TPO. One of the points raised by the TPO is that the technical knowhow loan has been obtained by conversion of technical knowhow fee payable to Goodyear Tyre and Rubber Co.. As per the TPO, what is indeed payable by the assessee is 13 ITA No.1891/PN/2013 ITA No.1970/PN/2013 A.Y. 2005-06 a charge/fee for obtaining technical knowhow and that it is not a pure cash loan taken by the assessee. According to the TPO, such a transaction cannot be compared with the prevailing lending rates in the domestic market at the time of raising of loan. Instead, according to him, the arm's length price would have to be determined by benchmarking the interest rates prevailing on borrowings from abroad at the time of payment of interest. Therefore, the plea of the assessee for comparing the interest paid @ 12% with the Prime Lending Rate of SBI was not accepted. Another reason advanced by the TPO is that assessee was also required to account for exchange fluctuation burden during the currency of the loan. Under these circumstances, as per the TPO, such a loan cannot be treated to be at par with a domestic loan raised from an Indian bank. In our view, the TPO is justified in saying that the impugned transactions involve loan liabilities in foreign currency and therefore it is not a domestic borrowing so as to compare the transaction of payment of interest with the domestic Prime Lending Rate of the Indian banks.
20. So however, one pertinent point has been raised by the assessee before us to the effect that in order to benchmark the interest cost incurred by the assessee it would be appropriate to evaluate the effective rate of interest payable by the assessee on the technical knowhow loan and foreign currency cash loan raised from the associated enterprise. Notably, the said argument has been raised by the assessee not only before us but also before the TPO as is evident from para 5 of the order of the TPO wherein the arguments of the assessee have been reproduced. The plea of the assessee is that the rate of interest of 12% for the current year cannot be considered in isolation by ignoring the interest-free moratorium period of initial nine years. The Ld. Representative for the assessee submitted in the course of hearing that although the rate of interest payable during the five year repayment schedule is 12%, but if the initial interest-free period of nine years is considered, the effective rate of interest would be even lower than the rate of 5.46% 14 ITA No.1891/PN/2013 ITA No.1970/PN/2013 A.Y. 2005-06 considered by the TPO as an arm's length rate. In this context, our attention has been drawn to a working furnished in the course of the hearing. With respect to the technical knowhow loan, it is explained that actual interest cost of Rs.1,15,58,522/- (inclusive of the increased cost of borrowings on account of exchange in fluctuation) is spread over the period of loan the effective rate of interest for the assessment year 2006-07 works out to 2.51% only. Similarly, with respect to the foreign currency cash loan on spreading the actual interest cost of 1,39,69,848/- over the period of loan and also taking into account the increased borrowings on account of exchange rate fluctuation, the effective rate of interest for assessment year 2006-07 comes to 2.67%. It is sought to be pointed out that the aforesaid effective rates of interest is less than the arm's length rate of interest considered by the TPO in respect of technical knowhow and foreign currency cash loans. Therefore, there was no necessity of making any adjustment in the transaction of payment of interest on account of technical knowhow and foreign currency cash loans in order to bring it to the level of arm's length price. The aforesaid workings are tabulated as under :-
"(i) Regarding technical knowhow loan :-
Interest
Loan Exchange +exchange Interest
Interest
Year outstanding fluctuation fluctuation rate %
spread (B)
(A) (C) cost D/A
D=B+C
1995 49,795,823 963210 - 963,210 1.93
1996 52,285,614 963210 2489791 3,453,001 6.60
1997 117,880,405 963210 2489791 3,453,001 2.93
1998 198,180,446 963210 5645041 6,608,251 3.33
1999 207,558,238 963210 9377791 10,341,001 4.98
2000 215,208,767 963210 7650529 8,613,739 4.00
2001 220,853,808 963210 5645041 6,608,251 2.99
2002 223,691,325 963210 2837517 3,800,727 1.70
2003 223,691,325 963210 - 963,210 0.43
2004 223,691,325 963210 - 963,210 0.43
2005 223,691,325 963210 - 963,210 0.43
2006 210,246,455 963210 - 963,210 0.46
Total/average 11,558,522 36,135,489 48,694,001 2.51
(ii) Regarding foreign currency cash loan :-
Interest
Loan Exchange +exchange Interest
Interest
Year outstanding fluctuation fluctuation rate %
spread (B)
(A) (C) cost D/A
D=B+C
15 ITA No.1891/PN/2013
ITA No.1970/PN/2013
A.Y. 2005-06
1996 13,44,02,400 12,69,986 - 12,69,986 0.94
1997 19,97,52,520 12,69,986 67,20,120 79,90,106 4.00
1998 20,94,04,140 12,69,986 9651620 1,09,21,606 5.22
1999 21,90,55,760 12,69,986 9651620 1,09,21,606 4.99
2000 22,87,07,380 12,69,986 9651620 1,09,21,606 4.78
2001 23,83,59,000 12,69,986 9651620 1,09,21,606 4.58
2002 24,38,24,000 12,69,986 5465000 67,34,986 2.76
2003 24,38,24,000 12,69,986 - 12,68,986 0.52
2004 24,38,24,000 12,69,986 - 12,69,986 0.52
2005 24,38,24,000 12,69,986 - 12,69,986 0.52
2006 24,38,24,000 12,69,986 - 12,69,986 0.52
Total/average 1,39,69,848 5,07,91,600 6,47,61,448 2.67
21. The aforesaid workings have not been disputed in the course of hearing before us. Be that as it may, the moot point is as to whether it is relevant to consider the stated rate of interest of 12% or the effective rate of interest for the purpose of benchmarking the transaction with comparable cases. The terms and conditions of the agreement approved by the RBI in relation to technical knowhow and foreign currency cash loans, which have been succinctly noted by us in the earlier part of this order, clearly establish that in the initial period of nine years there was a moratorium on interest payment and that assessee was not required to incur any interest costs. It is only subsequent to the moratorium period, assessee was to incur interest cost and that too, during the period of repayment of loans. Ofcourse, during the moratorium period the liability towards principal amount of loan was liable to be increased by 5% on account of exchange rate fluctuation. Considering the entirety of terms and conditions, therefore, the cost of borrowings to the assessee (i.e. on technical knowhow and foreign currency cash loans) are to be computed after factoring the initial period of moratorium. Therefore, it would be inappropriate to merely compare the stated rate of interest of 12% with the prevailing rates without taking into consideration the specific terms and conditions of the assessee's borrowings. Therefore, in-principle, we are agreement with the assessee for the proposition that it would be appropriate to compute effective rate of interest in respect of international transaction of loan entered into with the associated enterprise before carrying out the exercise of benchmarking such international transactions vis-à-vis the arm's length 16 ITA No.1891/PN/2013 ITA No.1970/PN/2013 A.Y. 2005-06 price/interest of the comparable uncontrolled transactions. On this aspect, the Ld. Departmental Representative reiterated the stand of the TPO to the effect that the Transfer Pricing Regulation of India provide that for comparability of an uncontrolled transaction with an international transaction, data relating to the relevant financial year alone is to be used and that the data relating to other periods not being more than two years prior to such financial year can be considered only if such data revealed facts which have an influence on determination of the transfer pricing in relation to the transaction being compared. In other words, as per the Ld. Departmental Representative, the aforesaid approach of considering the data of other years would not be appropriate. In our considered opinion, the aforesaid argument is quite fallacious. While computing the yearly effective rate of interest in respect of impugned loans what is being sought is the factoring of the terms and conditions of the loan agreements. Moreover, the point being made out by the TPO is on account of sub-rule (4) of rule 10B of the Income Tax Rules, 1962, which is of no relevance in the present context. The aforesaid sub-rule provides that the data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. The said provision has no relevance in the present context, wherein the issue relates to identifying and determining the correct international transaction which is required to be benchmarked under the Transfer Pricing Regulation. Therefore, the plea of the Revenue on this aspect is liable to be rejected. We hold so.
22. At the time of hearing, the Ld. Representative also relied upon the decision of the Ahmedabad Bench of the Tribunal in the case of DCIT vs. Hitachi Home & Life Solutions (India) Ltd. vide ITA No.182/Ahd/2011 & Others dated 12.08.2012 wherein the royalty paid by the assessee at 3.75% to the associated enterprise was sought to be benchmarked. The Revenue 17 ITA No.1891/PN/2013 ITA No.1970/PN/2013 A.Y. 2005-06 determined the arm's length rate of payment of royalty @ 3%, while assessee was charged 3.75% by the associated enterprise. The assessee had put up a defence on the ground that the effective rate of royalty payable was @ 2.30% on sales. It was contended that the royalty of 3.75% was payable after reducing various expenses from the sale value of the products but the effective rate worked out to 2.30%, which was comparable to arm's length rate being considered by the Revenue. On the basis of the assertion of the assessee to the effect that the effective rate of royalty was lower than the comparable transaction, the addition made by the TPO was deleted by the Tribunal. The Ld. Representative for the assessee submitted that the concept of the effective rate of royalty as against the stated rate of royalty was approved by the Tribunal for the purpose of benchmarking the international transaction of the assessee. In the present case also, in our view the ratio of the decision of the Ahmedabad Bench of Tribunal in the case of Hitachi Home & Life Solutions (India) Ltd. (supra) applies. Therefore, in conclusion, without opining on the other arguments raised by the assessee, we deem it fit and proper to delete the addition with respect to the interest paid on Technical knowhow and foreign currency cash loans on the ground that the effective rate of interest incurred by the assessee is lower than the arm's length rate of interest considered by the TPO. Thus, on this aspect assessee succeeds.
23. The other issue remaining is with respect to an adjustment made on account of ECB raised by the assessee. In this context, we have already noted the relevant facts. Assessee raised ECB loan of USD 90,00,000 for financing it's working capital requirements vide an agreement dated 12.09.2003. The said loan was raised by the assessee in terms of the then prevailing RBI notification LIBOR plus 3%, as applicable in September, 2003. It has been explained that the relevant Circular of RBI No.36 dated 14.11.2003 prescribed that EBCs could be raised for working capital requirements at the interest rates specified therein. The Ld. Representative submitted that the 18 ITA No.1891/PN/2013 ITA No.1970/PN/2013 A.Y. 2005-06 assessee having raised the ECB loan at the prevailing RBI notified rates, it could not be said that subsequently the said rate of interest is not an arm's length price/rate. The TPO has observed that in the revised rates notified by the RBI, the ceiling on the interest rates has been lowered. The TPO has observed that subsequent to 2003, when the rates prescribed by RBI have changed to the benefit of borrowers, assessee ought to have undertaken restructuring of the loan and re-negotiated lower rate of interest. That such an aspect has not been undertaken by the assessee and therefore he has applied the subsequent notified rates of the RBI for ECBs in order to determine the arm's length price/rate of interest on ECB loan.
24. On this aspect, the Ld. Representative submitted that the subsequent notifications by RBI for ECBs contained a restriction whereby ECB could not be availed for working capital requirements. In so far as the assessee is concerned, it was pointed out that ECB loan was raised for working capital requirements which was permissible in terms of the then prevailing RBI guidelines at the time of availing of loan in 2003. The Ld. Representative pointed out that before the TPO, assessee vide communication dated 19.02.2009 furnished an agreement for foreign currency cash loan availed by the associated enterprise from M/s J.P. Morgan Chase Bank, wherein the associated enterprise had paid interest @ LIBOR plus 4% i.e. 7.46% (3.46% + 4%) or alternate base rate +3%. In comparison, assessee had paid lower interest on ECB loan which was LIBOR plus 3% i.e. 6.46% (3.46% + 3%) by considering the ceiling prescribed by the RBI at the relevant point of time. In this context, it is sought to be submitted that assessee paid interest rate to the associated enterprise which was even lower than the cost of borrowing of the associated enterprise. In this context, a reference has been made to page 257 to 260 of the Paper Book wherein it was pointed out to the TPO that the rate of interest payable by the associated enterprise on its borrowing to provide ECB to the assessee was LIBOR plus 4% or alternate basis rate +3%. 19 ITA No.1891/PN/2013 ITA No.1970/PN/2013
A.Y. 2005-06 But keeping in mind, the RBI restrictions associated enterprise charged only LIBOR plus 3% from the assessee company. Ld. Representative submitted that this internal benchmark available with the assessee has been disregarded by the TPO.
25. In our considered opinion, the aforesaid comparable uncontrolled transactions i.e. the transaction between the associated enterprise and M/s J.P. Morgan Chase Bank provides a direct benchmark for the purposes of determining the arm's length price of payment of interest in respect of ECB loans. While applying CUP method, in our view, it is appropriate that the amount charged in an controlled transaction is examined with the amount charged in an uncontrolled transaction. In the present case, the aforesaid transaction brought out by the assessee qualifies the said tests. On this aspect, a gainful reference can also be made to the discussion of the Third Member Bench of the Tribunal in the case of Technimount ICB Pvt. Ltd. vs. ACIT (ITA No.4608 & 5085/Mum/2010 dated 17.07.2012) wherein the context of the clause (i) of rule 10B(e) of the Rules, it has been opined that the said rule itself provides that a preference shall be given to internal comparable uncontrolled transaction vis-à-vis external comparable uncontrolled transaction. The relevant discussion is as under :-
"10. Clause (i) of Rule 10B(e) stipulates that net profit margin from an international transaction with an AE is computed in relation to cost incurred or sales effected or assets employed etc. Clause (ii) is material for the present purpose. It provides that the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base. The 'base' of this provision takes one back to clause (i) which refers to cost incurred or sales effected or assets employed or to be employed. On splitting clause (ii) into two parts, it divulges that the reference is made to internal and external comparables. One part of clause (ii) refers to 'the net profit margin realized by the enterprise............ from a comparable uncontrolled transaction' and the other part talks of 'the net profit margin realized.......... by an uncontrolled enterprise from a comparable uncontrolled transaction'. It transpires that whereas the first part refers to the profit margin from internal comparable uncontrolled transactions, the second part refers to profit margin from an external comparable uncontrolled transaction. Thus, it is discernible that what is to be compared under this method is profit from a comparable uncontrolled transaction. The word 'comparable' may encompass internal comparable or external comparable. There is cue in the 20 ITA No.1891/PN/2013 ITA No.1970/PN/2013 A.Y. 2005-06 rule itself as to preference to be given to internal comparable uncontrolled transactions vis-a-vis externally comparable uncontrolled transactions. It is because the delegated legislature has firstly referred to the net profit margin realized by the enterprise (internal) from a comparable uncontrolled transaction and, thereafter, it points towards net profit margin realized by an unrelated enterprise (external) from a comparable uncontrolled transaction. Thus where potential comparable is available in the shape of an uncontrolled transaction of the same assesses, it is likely to have higher degree of comparability vis-a-vis comparables identified amongst the uncontrolled transactions of third parties. The underlying object behind computing ALP of an international transaction is to find out the profits which such enterprise would have earned if the transaction had been with some third party instead of related party. When the data is available showing profit margin of that enterprise itself from a third party, it is always safe and advisable to have recourse to such internal comparable case. The reason is patent that the various factors having bearing on the quality of output, assets employed, input cost etc. continue to remain by and large same in case of an internal comparable. The effect of difference due to such inherent factors on comparison made with the third parties, gets neutralized when comparison is made with internal comparable. Ex consequenti, it follows that an internal comparable uncontrolled transaction is more noteworthy vis-a-vis its counterpart, i.e., external comparable."
26. In view of the aforesaid, in our view, since the rate of interest paid by the assessee to its associated enterprise in respect of ECB loan is lower than the rate of interest paid by the associated enterprise to M/s J.P. Morgan Chase bank, the transaction of payment of interest on ECB loan raised from the associated enterprise is at an arm's length price. Therefore, the addition on account of interest paid on ECB loan is directed to be deleted.
27. In the aforesaid manner, insofar as the addition of Rs.66,04,445/- made by the Assessing Officer on account of transfer pricing adjustment relating to the payment of interest on loans raised from associated enterprise is concerned, the Assessing Officer is directed to delete the same.
28. The only other Ground of the assessee for assessment year 2006-07 is with respect to the action of the lower authorities in disallowing depreciation amounting to Rs.7,59,723/- claimed by the assessee on assets forming part of block assets but not used during the period under consideration. On this aspect, it was a common point between the parties that the said issue has been dealt with by the Tribunal in the assessee's own case in earlier 21 ITA No.1891/PN/2013 ITA No.1970/PN/2013 A.Y. 2005-06 assessment years of 2002-03 to 2004-05 vide ITA Nos.1879 to 1881/PN/2012 dated 15.09.2014. The claim of the assessee for depreciation was allowed by the Tribunal. It was also a common ground between the parties that the said order of the Tribunal continues to hold the field and therefore following the said precedent the assessee has to succeed on this aspect also. Therefore, the Assessing Officer is directed to allow appropriate relief to the assessee following the precedent by way of the earlier orders of the Tribunal in the assessee's own case.
29. In the result, the appeal of the assessee for assessment year 2006-07 is allowed.
30. In assessment year 2005-06 in the appeal of the assessee vide ITA No.1868/PN/2012, the first issue is with regard to the transfer pricing adjustment made with respect to the transaction of interest paid to the associated enterprise on technical knowhow and foreign currency cash loans. It was a common point between the parties that the facts and circumstances on this aspect are pari-materia to those considered by us in the appeal of the assessee for assessment year 2006-07 in the earlier paras. Therefore, our decision in relation to the aforesaid issue in the appeal for assessment year 2006-07 would apply mutatis mutandis in this year also. Following the same, assessee succeeds in assessment year 2005-06 also.
31. In assessment year 2005-06, another issue is with regard to an addition of Rs.5,48,472/- made by the Assessing Officer towards the import of capital goods. The relevant discussion in this regard made by the CIT(A) is as under :-
"12.3 In respect of the adjustment of Rs.5,48,472/- to the price paid by the appellant towards the import of capital goods, it has been observed that having a Global Transfer Pricing Policy does not mean that the markup stated 22 ITA No.1891/PN/2013 ITA No.1970/PN/2013 A.Y. 2005-06 in the Policy is automatically justified. As stated, the reasonableness of the markup has to be established. 10% markup over and above the cost of capital goods to AE cannot be said to be on lower side under any parameter of comparison. It is also observed that the evidences or certificate certifying the actual cost of incidental expenses as stated by the appellant like handling, warehousing, insurance, freight, etc. were not produced before the Assessing Officer nor before the TPO. Therefore, the contentions raised by the Transfer Pricing Officer and the A.O. are accepted. In view of the facts, I confirm the adjustment of Rs.5,48,472/- on account of excess price paid over and above the ALP, considering 10% as the reasonable range of markup to the AE."
32. Considering the aforesaid discussion and in the absence of any credible argument raised by the assessee in the course of hearing, the aforesaid decision of the CIT(A) is hereby affirmed and assessee fails on this aspect.
33. Resultantly, the appeal of the assessee for assessment year 2005-06 is partly allowed.
34. In assessment year 2007-08 in the appeal of the assessee vide ITA No.1869/PN/2012, the only issue is with regard to an addition of Rs.29,48,183/- on account of payment of interest on ECB loan raised from Goodyear USA. It was a common point between the parties that the facts and circumstances on this aspect are pari-materia to those considered by us in the appeal of the assessee for assessment year 2006-07 in the earlier paras. Therefore, our decision in relation to the aforesaid issue in the appeal for assessment year 2006-07 would apply mutatis mutandis in this year also. Following the same, assessee succeeds in assessment year 2007-08 also.
35. Resultantly, the appeal of the assessee for assessment year 2007-08 is allowed.
36. The only two appeals remaining are the Revenue's appeals for assessment years 2005-06 and 2007-08. In both the appeals, a common 23 ITA No.1891/PN/2013 ITA No.1970/PN/2013 A.Y. 2005-06 issue raised is with regard to the action of the CIT(A) in allowing depreciation on machinery not used for production of two/three wheeler tyres during the year under consideration. On this aspect, it was a common point between the parties that similar dispute has been considered by the Tribunal in the assessee's own case for assessment years 2002-03 to 2004-05 vide ITA Nos.1879 to 1881/PN/2012 dated 15.09.2014. Considering the aforesaid precedent which continues to hold the field, we find no reasons to interfere with the decision of the CIT(A). The same is hereby affirmed.
37. In the result, both the appeals of the Revenue are dismissed.
38. Resultantly, the appeals of the assessee for assessment years 2006-07 and 2007-08 are allowed that for assessment year 2005-06 is partly allowed and the appeals of the Revenue for assessment years 2005-06 and 2007-08 are dismissed.
Order pronounced in the open Court on 28 th November, 2014.
Sd/- Sd/-
(R.S. PADVEKAR) (G.S. PANNU)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Pune, Dated: 28 th November, 2014.
Sujeet
Copy of the order is forwarded to: -
1) The Assessee;
2) The Department;
3) The CIT(A), Aurangabad;
4) The CIT, Aurangabad;
5) The DRP-I, Mumbai;
6) The DR "B" Bench, I.T.A.T., Pune;
7) Guard File.
By Order
//True Copy//
Assistant Registrar
I.T.A.T., Pune