7 October, 2016
Income-tax Appellate Tribunal -“K”Bench Mumbai ,,लेखा सद य एवं, शि जीत डे, याियक सद य सव ी राजे Before S/Shri Rajendra,Accountant Member and Saktijit Dey,Judicial Member आयकर अपील सं/ ITA No.1131/Mum/2015 : िनधा रण वष /Assessment Year-2010-11 M/s. Everest Kanto Cylinder DCIT (LTU)-1,29th Centre No.1, World 204, Raheja Centre, Free Press Journal Trade Centre,Cuffe Parade,Mumbai-5. Vs. Marg, Nariman Point,Mumbai-400 021. PAN:AAACE 0836 F (Appellant) (Respondent)
आयकर अपील सं/ ITA No.1042/Mum/2015 : िनधा रण वष /Assessment Year-2010-11 DCIT (LTU)-129th Centre No.1, World M/s. Everest Kanto Cylinder Vs.
Trade Centre,Cuffe Parade, Mumbai-5. Nariman Point, Mumbai-400 021.
(Appellant) (Respondent) Revenue by: Shri N.K. Chand-CIT Assessee by: Shri Shekhar Gupta सुनवाई क तारीख / Date of Hearing: 27.09.2016 घोषणा क तारीख / Date of Pronouncement:07.10.2016 आयकर अिधिनयम,1961 अिधिनयम क धारा 254(1)के के अ तग त आदे श Order u/s.254(1)of the Income-tax Act,1961(Act) सद य, राजे के अनुसार लेखा सद य ार/ PER Rajendra A.M.-
Challenging the order dated 24.12.2014 of the DRP-1, Mumbai,the Assessing Officer (AO) and the assessee have filed cross appeals for the above mentioned Assessment year (AY). Assessee-company,engaged in the business manufacturing of gas cylinders,filed its return of income on 15.10.2010declaring income of Rs.18.84 Crores.The AO completed the assess – ment u/s. 143(3) r.w.s.144C(13) on 29.10.2015,determining its income at Rs.33.41 Crores. Vide its application,dt.26/9/2016,the assessee made submissions to allow it to produce additional evidences as per Rule 29 of the ITAT Rules,1963(Rules).It was stated that sanction letter,dt.3.3.2010,regarding loan taken by EKC,Dubai and sanction letter regarding loan taken by EKC-China could not be produced before the AO,that same were vital to decide the Ground No.3 raised by the assessee.During the course of hearing before us, the Authorised Representative(AR)made same submissions and requested that both the documents would help the Bench to dispose the case.The Departmental Representative (DR) left the issue to the discretion of the Becnh.After going through the documents we find that they are relevant to decide the issue with regard to rate of loan.Therefore,document submitted are admitted as per Rule 29 of the Rules.
ITA No.1131/M/15(By Assessee ):
2.First ground of appeal is about disallowance of Rs.1.06lakhs u/s. 14A of the Act.During the 1131/M/15 & 1042/M/15-Everest Kanto Cylinder Ltd.
course of hearing before us,the Authorised Representative (AR) of the assessee stated that considering the smallness of the tax effect the assessee was not interested in pursuing Ground No.1.Hence, same stands dismissed as not pressed.
3.Second Ground is about addition of Rs.7.43 crores on account of guarantee commission pursuant to the direction of the Dispute Resolution Panel (DRP).During the assessment proceeding,the AO found that the assessee had entered into International Transactions (IT.s) with its Associate Enterprises (AE.s).He made a reference to the Transfer Pricing Officer (TPO),who found that the EKC International FZE ,UAE-the AE of the assessee-had taken a loan of USD 23 million from ICICI Bahrain for working capital and term loan, that as per the terms on loan agreement between the AE and the bank the assessee was required to give corporate guarantee to the banker,against the said guarantee it had charged guarantee commission@ 0.5% p.a., that the AE had availed the loan of USD 13 million only against the limit.The TPO further found that EKC Industries (Tianjin)Co.Ltd.,China, an AE of the assessee,availed loan of USD 4 million from Citi bank, that the assessee was required to get stand by letter of credit (SBLC/corporate guarantee) from the India Banker, that Citi Bank issued SBLC to Chinese Bank, that based on such SLBC overseas bank granted credit facility to the AE.The assessee contended that the assessee did not charge guarantee fee from EKC, China,that as per the transfer pricing regulation of China such a payment was not allowable. He also noticed that the assessee had further given corporate guarantee to CP Industries, USA for borrowing of 45 million USD.
3.1.The TPO found that in the TP report it was submitted that while determining the Arm’s- Length Price(ALP) at 0.5% the assessee had applied CUP. It was contended that Yes Bank,an independent banker,had provided similar financing arrangement to EKC,India and had charged 0.5% for the said financial arrangement,that internal comparable had been used to determine arms length rate for commission charged by EKC India to EKC Dubai.After considering the submission of the assessee, the TPO suggested an adjustment of Rs.10,79, 62, 267/- on account of corporate guarantee commission as under :-
Name of the AE Corporate Guarantee Commission ALP of the Corporate Adjustment Charged Guarantee Commission EKC International 53,97,238 10,796,143 53,97,238 FZE, UAE EKC Industries NIL 75,10,361 75,10,361 (Tianjin), China CP Industries Ltd., NIL 9,50,53,001 9,50,53,001 USA TOTAL 53,97,238 11,33,59,505 10,79,62,267 2 1131/M/15 & 1042/M/15-Everest Kanto Cylinder Ltd.
The AO issued a draft assessment order on the above lines to the assessee and it filed objections before the DRP.
3.2.After considering the elaborate submissions of the assessee and the case laws relied upon by it, the DRP held that the Tribunal in assessee’s own case for the AY 2007-08 had upheld the additions made on account of guarantee commission,that the ALP rate of guarantee commission in the case of USA and Chinese AE.s had been restricted to 3%, that the assessee had taken huge risks in respect of corporate guarantee regarding Dubai,US and Chinese AE.s. The DRP restricted the rate of guarantee commission to 3% with regard to US and Chinese AE.s.
4.During the course of hearing before us,the AR stated that the Hon’ble Bombay High Court while deciding the appeal for AY.2007-08(Income tax Appeal No.1165 of 13 dt.08.05.2015 ) had deliberated upon the issue.The DR stated that CUP adopted by the assessee was not same. He referred to Pg-No.16 of the order of the TPO .
5.We have heard the rival submissions and perused the material. We find that the Hon’ble High Court had considered the following question regarding guarantee commission.
“3. Whether on the facts and in the circumstances of the case and in law the Hon’ble ITAT “K” Bench Mumbai was right in deleting the addition of Rs.28,50,353/- on account of TP adjustment on guarantee commission.”
Upholding the order of the Tribunal,wherein the ITAT had deleted the addition on account of guarantee commission of Rs.28.50 lakhs, the Hon’ble High Court has held as under :-
“………..In the matter of guarantee commission, the adjustment made by the TPO were based on instances restricted to the commercial banks providing guarantees and did not contemplate the issue of a Corporate Guarantee. No doubt these are contracts of guarantee, however, when they are Commercial banks that issue bank guarantees which are treated as the blood of commerce being easily encashable in the event of default, and if the bank guarantee had to be obtained from Commercial Banks, the higher commission could have been justified. In the present case, it is assessee company that is issuing Corporate Guarantee to the effect that if the subsidiary AE does not repay loan availed of it from ICICI, then in such event, the assessee would make good the amount and repay the loan. The considerations which applied for issuance of a Corporate guarantee are distinct and separate from that of bank guarantee and accordingly we are of the view that commission charged cannot be called in question, in the manner TPO has done. In our view the comparison is not as between like transactions but the comparisons are between guarantees issued by the commercial banks as against a Corporate Guarantee issued by holding company for the benefit of its AE, a subsidiary company. In view of the above discussion we are of the view that the appeal does not raise any substantial question of law and it is dismissed. There will be no order as to costs”.
1131/M/15 & 1042/M/15-Everest Kanto Cylinder Ltd.
We find that there is no material difference between the facts of the earlier year and the facts for the year under consideration. Therefore, respectfully following the principle laid down by the Hon’ble High Court in assessee’s own case, we hold that DRP was not justified in confirming the addition made by the AO.Reversing the order of the AO,completed in pursuance of the direction of the DRP, we decide the second ground in favour of the assessee.
6.Next ground is about addition of Rs.6.88 crores on account of interest charged to AE. During the TP proceedings,the TPO found that the assessee had advanced loans of Rs.71.93 crores(EKC Intl.,UAE-Rs.35.60 lakhs + EKC Industries, China -Rs.36.33 lakhs) to its AE.s, that the loan to UAE-AE was advanced on various dates, that the first loan amounting to USD 10 million was advanced on 31.10.2007 at the fixed rate of 7%, that subsequent loans were advanced to AE at LIBOR + 1%.He found that average rate charged from AE was 3.49%. With regard to EKC, Industrial–China the TPO found that the assessee had advanced a loan of USD 0.85 million,that it had charged interest @ 5%, that an amount of USD 4.30 million was advanced out of zero coupon foreign currency, convertible bonds and USD 3.75 million was advanced from the reserves of the company . Referring to the order of the AY.2008-09 the TPO proposed to apply the interest @ 14.39% on the loans advanced to the AE.s.The assessee objected to the proposal of the TPO stating that it had raised zero coupon bonds during the year amounting to USD 35 million at an interest rate of 7.25%, that these funds were placed in foreign currency in bank accounts in Citi Bank ,London, that no interest was payable on the zero coupon bonds, that the assessee had raised funds from other sources, that during AY 2007-08 it had raised Rs.92 crores by way of preferential allotment of shares to Brightwill Ltd.,that Rs.88.70 crores were raised by way of preferential allotment of shares to TVG India Investment Holding Ltd.,that total 320 crores were raised by the assessee, that out of that 251 crores were invested in the AE.s, that it had borrowed by way of term loan at interest rate of 7% during AY 2006-07, that EKC International , UAE had received loan from ICICI,Bank,Bahrain at LIBOR at 0.95%, that Tribunal had held that LIBOR +rate should be used for determining the ALP of foreign currency loans. After considering the submission of the assessee, the TPO held that the assessee had raised firstname.lastname@example.org%,that it had advanced loans to UAE-AE and China-AE @ 3.49% and 5% respectively,that the assessee had used CUP method for benchmarking the transaction, that the assessee was bearing risk of foreign exchange fluctuation on funds raised by it and for investing in share capital of the AE, that the assessee should have charged interest rate of 4 1131/M/15 & 1042/M/15-Everest Kanto Cylinder Ltd.
9.55% from the AE.s as per the cost plus method.He calculated the interest to be charged on EKC-International UAE as under :-
“An adjustment of Rs.6,88,34,448/- is made on account of interest and an adjustment of Rs.10,79,62,267/- is made on account of corporate guarantee. Therefore, total adjustment in this case is worked out to Rs.17,67,96,715/-.
This order is in response to specific reference under Section 92CA(1) of the Act received and will apply to the case of the Assessee for A.Y.2010-11 only and not for any subsequent years.”
Similar calculation was made for the Chinese AE.Finally, he made the following adjustment on account of loans given to AE.s.
Name of the AE Interest Charged ALP of the Interest Adjustment EKC International 1,28,34,502 6,25,92,961 4,97,58,459 FZE, UAE EKC Industries 1,81,67,609 3,72,43,598 1,90,75,989 (Tianjin), China TOTAL 3,10,01,111 9,98,36,559 6,88,34,448 In conformity with the order of the TPO the AO proposed the addition of Rs.6.88 crores to the income of the assessee in its draft order.
7.Aggrieved by the order of the AO, the assessee filed objection before the DRP. Assessee made elaborate submission before the DRP and relied upon 8 cases delivered by the various benches of the Tribunal. It was also argued that in the subsequent years, DRP/ITAT had adopted LIBOR + 1% for Dubai subsidy and 7% for China subsidy.
7.1.After considering the available material the DRP referred to the earlier years discussion with regard to charging of interest. The DRP held that assessee had granted loan to its AE.s without any security, that it had undertaken various risks, that in a third party situation the transaction under consideration had to be benchmarked at the interest rate that could be cost of borrowing to the assessee,that businessmen would certainly charge a mark up to protect itself from various risks, that these factors were not considered by the Tribunal while deciding the issue,that the Tribunal had not considered the case of Perot Systems PSI (I) Ltd.(ITA.s/2320-2322/Del/2008, dt.13.10.2009), that the Tribunal had decided the issue relying on its order in assessee’s own case for the AY.2008-09, that the decision of the Tribunal for 2008-09 could not be applied.Finally, the DRP dismissed the objections raised by the assessee.
8.Before us,the AR argued that the Tribunal had held that LIBOR + 2% would be a reasonable rate in such cases.He referred to the cases of Tata Autocom Systems Ltd. (56taxmann.com 206) and Cotton Naturals (I) )P.) Ltd. (55taxmann.com 523). He also 5 1131/M/15 & 1042/M/15-Everest Kanto Cylinder Ltd.
referred to order of the Tribunal for the AY 2009-10 in assessee’s own case ITA/550/Mum/2014 dt.27.2.15.The DR stated that interest should be charged as per the prevalent market rate.
9.We have heard the rival submissions and perused the materials before us and find that identical issue was dealt by the Tribunal while deciding the appeal for AY 2009-10 (supra), as under :-
“22. Having considered the rival submissions as well as relevant material on record, at the outset, we note that an identical issue has been considered and decided by this Tribunal in assessee’s own case for A.Y. 2008-09 in para 11 and 12 as under:- “11. We had considered rival contentions and gone through the orders of lower authorities. As per our considered opinion, appropriate international rates should be used for the purpose of the comparability analysis. For this purpose, the London Inter Bank Offer Rate (LIBOR) is an internationally recognized rate for benchmarking loans denominated in foreign currency. For this purpose, reliance may be placed on the following decision of the coordinate bench :-
i) Great Eastern Shipping Co.Ltd (ITA No 397/M/2012) dated 10 January 2014;
ii) Mahindra & Mahindra Limited (ITA No 7999/M/2011) dated 8 June 2012;
iii) Hinduja Global Solutions Limited (ITA No 254/M/2013) dated 5 June 2013
iv) Aurionpro Solutions Limited (ITA No 7872/M/2011) dated 12 April 2013;
v) Aurobindo Pharma Ltd (ITA No 1866/Hyd/2012) dated 29 November 2013;
vi) Cotton Naturals (I) Pvt. Limited (ITA No 5855/Del/2012) dated 8 February 2013;
vii) Siva Industries and Holdings Ltd. vs ACIT, IT Appeal No. 2148 (Mds.) of 2010;
viii) Bharti Airtel Ltd (ITA No 5816/0el/201Z) dated 11 March 2014
ix) Infotech Enterprises Limited (ITA No 115/Hyd/2011) dated 16 January 2014;
x) Kohinoor Foods Ltd (ITA Nos 3688-3691/0el/2012 and ITA Nos 3868-3869/0el/2012) dated 21 July 2014; and
xi) Four Soft Ltd vs. OCIT, IT Appeal No. 1495 of 2011 (Hyderabad Tribunal)
12. In light of the above decisions, the rate to be used for undertaking an adjustment should be LIBOR and not the average yield rates considered by the learned TPO. The LIBOR rate for March 2008 was 2.6798%. However the assessee has charged 7% from its AE as per the internal CUP available. Thus, the assessee has charged interest to EKC Dubai and EKC China at the rate higher than existing LIBOR rates. Accordingly, the said transaction of providing loan to EKC Dubai and EKC China is at arm’s length. Additions made by the AO are accordingly set aside.”
23. Following the earlier order of this Tribunal in assessee’s own case, we hold that the arm’s length rate in respect of loan provided to the AE should be LIBOR + 2%. Accordingly, the Assessing Officer is directed to recomputed the arm’s length rate in respect of the loan transaction to each AE of the assessee by clubbing all the loan transactions of each AE and then compare the interest charged by the assessee with arm’s length rate at LIBOR +2%. It appears that as regards the transactions of loan to its AE at China, the said transaction is at arm’s length as the as has charged the interest at 7%, therefore, only with respect to the transaction of loan to AE at Dubai are required to be re-computed for the purpose of TP adjustment.”
Respectfully,following the same we direct the AO accordingly.Ground No.3 is decided in favour of the assessee,in part.
1131/M/15 & 1042/M/15-Everest Kanto Cylinder Ltd.
10.The only issue raised by the AO is about restricting the bank guarantee commission to 3% in relation to AE.s of China and USA .
10.1While deciding Ground No.2 of the appeal filed by the assessee we have adjudicated the issue in favour of the assessee and against the AO. Following the same, Ground raised by the AO is dismissed.
As a result, appeal filed by the assessee is partly allowed and appeal filed by AO is dismissed. फलतः िनधा रती ारा दािखल क गई अपील अंशतः मंजूर क जाती है और िनधा रती अिधकारी ारा दािखल क गई अपील नामंजूर क जाती है.
Order pronounced in the open court on 7th October, 2016.
आदेश क घोषणा खुले यायालय म दनांक 7 अ टूबर, 2016 को क गई ।
(शि जीत डे / Saktijit Dey) (राजे / Rajendra) Sd/- Sd/- याियक सद य / JUDICIAL MEMBER लेखा सद य / ACCOUNTANT MEMBER मुंबई Mumbai; दनांकDated : 07 . 10.2016. Jv.Sr.PS. आदेश क ितिलिप अ ेिषत/Copy of the Order forwarded to : 1.Appellant /अपीलाथ 2. Respondent / यथ
3.The concerned CIT(A)/संब अपीलीय आयकर आयु#, 4.The concerned CIT /संब आयकर आयु#
5.DR “A ” Bench, ITAT, Mumbai /िवभागीय ितिनिध, खंडपीठ,आ.अ. याया.मुंबई
6.Guard File/गाड फाईल स यािपत ित //True Copy// आदेशानुसार/ BY ORDER, उप/सहायक पंजीकार Dy./Asst. Registrar आयकर अपीलीय अिधकरण, मुंबई /ITAT, Mumbai.