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Judgment
PER ANUBHAV SHARMA, JM:
This appeal is preferred by the assessee against the final assessment order dated 27.12.2013 passed by the Ld. DCIT, Circle-18(1), New Delhi, (hereinafter referred as the ‘Assessing Officer’) u/s 143(3) r.w.s 144C(4) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) for AY: 2009-10.
Heard and perused the records. Assesseeis engaged in the manufacturing and sale of tractor implements, linkage parts, systems and forgings. Its sales are primarily derived from unrelated parties.In January 2005, assesse had set up a wholly owned subsidiary in U.S.A. namely, Uniparts USA Limited ("UUL") which is a routine distributor of assessee’s products in U.S.A. Currently, assesse exports only three point linkage systems, spares and components to UUL. The case of assessee is that Uniparts Group has entered into a 50:50 Joint Venture agreement with Kavee Hydraulics in Holland in January 2007. Kavee Hydraulics was thereafter named as Uniparts Kavee B.V (UBV"). The core business of UBV is the development and production of high-quality cylinders, hydraulic power units, hydraulic hose and mechanical parts. It is also engaged in the distribution of products bought from UIL.
A brief background to proceedings before us is that in the impugned orders TP adjustment was made of Rs. 26,23,286/- alleging interest income received form AE on loan is not at arm’s length. This is challenged by way of ground no. 3.
Disallowance of interest expense was made to the extent of Rs. 72,23,773, which was challenged by ground no. 4.
A disallowance of Rs. 57,45,825 was made on account of expenses incurred on ocean, air freight and marine insurance, covered by ground no. 5.
Then by order dated 30/09/2021 a co-ordinate bench had has partly granted relief to the assessee with regard to ground no. 4 and 5 but decided ground no. 3 against the assessee by following findings:
“10.Insofar as the second loan given to UBV is concerned, the assessee has charged interest @ 6.138%, whereas the TO has charged interest @ 8.138% and quarrel is restricted to 2%.
11.The Id. counsel for the assessee has heavily relied upon the decision of the Hon'ble Delhi High Court in the case of CIT v. Bharti Airtel Ltd. [IT Appeal No. 606 of 2014, dated 25-2-2015). The followingdistinguishable:
“8.The ITAT has also taken note of the fact that two specific comparables of USD borrowings i.e. L&T and Seri Infrastructure, on the interest rate of Libor had been taken into consideration. There is no material whatsoever, save and except: for vague observations about weak financials of thesubsidiaries- which are not supported by any specific facts and proceed on sweeping generalizations and assumptions, to reject the comparables taken by the assessee. When a Transfer Pricing Officer rejects comparables taken by the assessee, he has to set out specific, cogent and legally sustainable reasons for doing so. On this point, therefore, the stand of the Assessing Officer cannot be accepted."
12.It can be seen from the above that the Hon'ble High Court has not accepted the contention of the revenue because no supporting facts have been given for assumption of weak financials of the subsidiaries, whereas, in the case in hand, the TPO has given: specific reasons for adopting credit rating of BB, which prompted him to adopt the LIBOR rate with add on of 400 basis points.
13.A perusal of the loan agreement between the appellant and UUL show the following clauses:
"1. INTEREST
The Borrower shall pay to UIL interest on the principal amount of the Loan outstanding form time to time quarterly in each year. The rate of interest shall be at the rate of 8% p.a. Interest shall accrue from day to day and shall be computed on the basis of 360 days a year and the actual number of days elapsed. However, Lender agrees that in case of nonpayment of interest by Borrower, the same shall be accumulated and be added in its principal amount annually.
2. REPAYMENT
Notwithstanding anything to the contrary contained in the Loan Agreement, the UIL agrees that the Loan shall be repayable by the Borrower when sufficient funds are available with the Borrower. In no event UIL shall force to the Borrower to pay the Loan amount. The Loan amount shall be treated as subordinate to any loan, existing or future, taken by the Borrower from any bank or financial institutions.
3. CONVERSION OF LOAN
Notwithstanding anything to the contrary contained in the Loan Agreement, the UUL agrees that the outstanding Loan (together with accumulated interest/if any) may be converted into common stock or preferred stock of the UUL at any point of time with the mutual consent of both the parties.
4. SECURITY FOR THE LOAN
UIL agrees that the Loan together with all interest stipulated in or payable under the Loan Agreement shall be free from security. The Lender agrees that Borrower shall not be required to give any kind of security for the above Loan."
13.1A perusal of the above show that UUL agreed to repay the loan as and when sufficient funds are available with it and if not repaid, then agreed that the outstanding loans, together with accumulated interest, to be converted into common stock or preferred stock of UL at any point of time.
14.We are of the considered view that these clauses in the loan agreement are nothing but eye-wash as the appellant company is the holding company of the borrower and have sanctioned loan for unsecured junior debt loan upto US$ 7 million. The above facts have to be considered alongwith the fact that UUL has its Registered Office in the State of the Delaware, USA and in its fourth year of operations, it employed four employees for managing its warehousing operations.
15.Relevant clauses of the agreement with UBV are as under:
"1. AMOUNT
The Borrower agrees to borrow from UIL and UIL agrees to lend to the Borrower for the purpose of operational needs (the "Purpose"), a junior debt funding not exceeding € 7,10,000/- ("the Loan"). The Borrower shall not use the Loan provided under the Agreement for any illegal purposes.
2. INTEREST
The Borrower shall pay to UIL interest on the principal amount of die Loan outstanding form time to time quarterly in each year. The rate of interest shall be Euribor plus 2.00 Bps pa. Interest shall accrue from day to day and shall be computed on the basis of 365 days year and the actual number of days elapsed. However, Lender agrees that in case of non-payment merest by Borrower, the same shall be accumulated and be added in its principle amount.:
3. REPAYMENT:
Notwithstanding anything to the contrary contained in the Loan Agreement, the UIL agrees mat the Loan shall be repayable by the Borrower when sufficient funds are available with the Borrower. In no event UIL shall force to the Borrower to pay the Loan amount.
The Loan amount shall be treated as subordinate to any loan, existing or future, taken by the Borrower from any bank or financial institutions.
4. CONVERSION OF LOAN
Notwithstanding anything to the contrary contained in the Loan Agreement, the UEBV agrees that the outstanding Loan (together with accumulated interest, if any) may be : diverted into common stock or preferred stock of the UEBV at any point of time.
5. SECURITY FORTHE LOAN
UIL agrees that the Loan together with all interest stipulated in or payable under the Loan Agreement shall be free from security. The Lender agrees that Borrower shall not be required to give any kind of security for the above Loan."
16.A perusal of the above clauses shows that the underlying facts are identical to the facts of giving loan to UUL. As mentioned elsewhere, the facts of the case are clearly distinguishable from the facts of the decision of the Hon'ble High Court of Delhi [supra] relied upon by the ld. counsel for the assessee. In all other decisions of the coordinate benches, relied upon by the ld. AR, the benches have followed the decision of the Hon'ble High Court of Delhi [supra], therefore, they are also distinguishable from the facts of the case.
17.Further, reliance was placed on the decision of the coordinate bench in the case of Aurionpro Solutions Ltd. v. Addl. CIT [2013] 33 taxmann.com 187/27 ITR [T] 276 (Mum.) wherein the coordinate bench, using its discretion, applied LIBOR + 2% whereas the TPO took the ALP LIBOR +3%. In our considered view, the coordinate bench; in its wisdom and discretion, took a particular view on the facts of that case in hand.
18.Considering the facts of the case in hand in light of the two loan agreements mentioned elsewhere, and considering the fact that the assessee itself has charged interest @ 8% in the case of UL and 6.138% in the case of UBV, we do not find any error or infirmity in the transfer pricing approach of the TPO upheld by the DRP. Ground No. 3 with all its sub-grounds is dismissed.”
However, assessee succeeded before Hon’ble Delhi High Court and the relevant part of the same is reproduced below:
“2.The record shows that both on 30.01.2023 and 17.04.2023, Mr. Mayank Nagi, who appears on behalf of the appellant, stated that all that the appellant seeks, by way a direction, from this court is that the matter be remanded to the Income Tax Appellate Tribunal [in short, "Tribunal"], as the issue concerning Arm's Length Price (ALP) with regard to the interest on loan extended by the appellant/assessee, has not been dealt with by the Tribunal.
3.Mr. Nagi had indicated that this aspect was not flagged in AYs 2007-08 and 2008-09. The relevant records have been filed by Mr. Nagi qua this aspect.
4.MrAseem Chawla, learned senior standing counsel, who appears on behalf of the respondent/revenue, affirms this position that the documents filed by MrNagi have been served on him.
5.Mr. Chawla also accepts that the aforementioned issue has not been dealt with by the Tribunal.
6.Accordingly, the impugned order is set aside, albeit, only to the limited extent concerning ascertainment of ALP on international transactions pertaining to interest on loan extended by the appellant to its Associated Enterprises.”
Thus we are called upon to decide ground no. 3 afresh. Now factually as with regard to this ground no. 3 it comes up that the A.O. during assessment proceedings noted that the assessee company has taken loan from banks at an interest @14-16% P.A. and has paid interest of Rs. 10.78 crores to Banks. But at the same time it has given loan to its wholly owned subsidiary company M/s Unilink Engineering Company Pvt. Ltd. @6% only. The total interest recovered from subsidiary company during the year is Rs.43,34,264/-. On being asked to justify this, it was submitted by assessee that concessional interest rate was charged to the subsidiary as it was incurring losses. This explanation of assessee was not accepted by the AO as the assessee company is incurring interest expenses on borrowed funds @ 14-16% P.A. Financial performance of the subsidiary company does not justify giving of loan at interest rate which is discounted by more than 60%. Considering the interest received (@6% P.A.) from subsidiary i.e. Rs. 43.34.264/- and adopting an interest rate @16%, the shortage in interest recovered from subsidiary was worked out at Rs.72,23,773/- (1,15,58,037-43,34,264) and to that extentinterest expenses of Rs. 10.78 crores was proposed to be disallowed by AO.
The assesseechallenged before DRP submitting that M/s Unilink Engineering Pvt. Ltd. is a wholly owned subsidiary of the assessee company which is holding 100% Equity Shares of M/s Unilink Engineering Pvt. Ltd. and both the companies are engaged in the same business of manufacturing of tractor parts and accessories. M/s Unilink Engineering Pvt. Ltd is continuously running into losses due to heavy capitalization in machineries equipments etc. and it was in need of money to meet its day to day requirements. Since, M/s Unilink Engineering Pvt. Ltd was not able to get the required bank loans the assessee company being the owners of 100% Equity Capital of M/s Unilink Engineering Pvt. Ltd. was morally bound to help M/s Unilink Engineering Pvt. Ltd in the situation of financial crises and accordingly extended the loans.As the financial conditions of M/s Unilink Engineering Pt. Ltd was not very positive and it was incurring continuous operating losses, the assessee company has decided to charge the interest @ 6% per annum to avoid further increase in operating losses of M/s Unilink Engineering Pvt. Ltd. The assessee company has paid a total amount of Rs. 9,65,99,996/- as interest to various banks on "credit facilities" enjoyed during the F.Y. 2008-09 and the total outstanding balance of various Secured Loans as on 31" March, 2009 was of Rs.1,45,98,11,345/-. Considering the ratio of interest the divided by the amount of loan the percentage of interest comes-out to 6.61% which is very much close to 6% rate of interest charged from M/s Unilink Engineering Pvt. Ltd..That the assessee company is charging interest on loan extended to its wholly owned subsidiary, M/s Unilink Engineering Pvt. Ltd for the last many years and the same has been allowed and no addition has been made on this account in any of earlier years assessments.That the Paid-up Capital of the assessee company was Rs. 1412.73 Lacs and accumulated profits as on 31% March, 2008 were of Rs. 11349.65 Lacs. It may be presumed that the loan amounting to Rs. 1191.56 Lacs to its wholly owned subsidiary, M/s Unilink Engineering Pvt. Ltd, has been extended out of the Paid-up Capital and free reserves of the Company which are available to the assessee company free of interest.
DRP was not satisfied and held as follows;
“We have considered that facts of the case. Submission of the assessee has also been gone through. The arguments of assessee that in earlier years no disallowance has been made out of interest expenses on charging interest from subsidiary at lower rate is not relevant as principle of res-judicata is not applicable to income tax proceedings. As regards assessee's argument that the loan advanced to M/s Unilink Engeerings Pvt. Ltd. can be presumed out of accumulated profits and reserves is also not acceptable as the accumulated profits and reserves has already been invested in the form of other assets. The assessee arguments that effective rate of payment of interest by it comes to 6.61% is mathematical statement only which cannot change the fact that it is paying interest to Bank @15-16% which has not been disputed. As regards assesses justification for charging substantially lower rate of interest from M/s Unilink Engineering pt. Ltd. being its wholly subsidiary which is engaged in same business is not acceptable again as the assessee and it wholly subsidiary are two different and distinct assessable entities. Therefore, assessee has to justify the expenses claimed by it and allowbility thereof as per provisions of Income tax act. As regards assessee's claim of applicability of decision of the apex court in the caseof S.A. Builders Ltd. (Supra) we are of the opinion that commercial expediency of assessee in advancing loan to its subsidiary at lower Rate could not be established by the assessee either before AO or before DRP. We are therefore of the opinion that AO has rightly proposed this disallowance. The same is therefore upheld and this objection of the assessee is rejected.”
Ld. AR has relied decision of Hon'bleJurisdictional High Court in case of Bharti Airtel Limited in ITA 606/2014 where inHon'ble High Court vide order dated 25 February 2015 has upheld a co-ordinate bench decision that the adjustment for risk and lack of security are not valid as the assessee has lent money to its subsidiary under its management and control. This factor reduces the risk rather than increasing it.
We find that the Hon'ble jurisdictional High Court, in para 10 of Bharti Airtel Limited (supra) has explicitly stated that lending to subsidiaries reduces risk and there is no rationale for adjustment. The finding of the Hon’ble jurisdictional High Court is reproduced hereunder:
“10.The Tribunal further noticed that the assessee advanced monies to the subsidiaries which were under its management and control, which in fact substantially reduced the risk and in these circumstances, there was no rationale of adjusting any amount of higher basis.
11.This court is of the opinion that the reasoning of the ITAT on each of the heads which went into the adjustment of Rs 10,11,786/- is reasonable and justified and does not call for any interference. No question of law arises.”
Ld. AR has also showcased that this ratio of Hon’ble High Court decision in case of Bharti Airtel (supra) has thereafter beenfollowed consistently in following cases:
UFO Movies India Ltd reported in 175 TTJ 633(Del) copy enclosed at pages 37 to 45 of case law PB - relevant at page 42 of case law PB, paras 9 to 11
Adani Ports and Special Economic Zone reported in (2019) 104 taxmann.com 368(Ahd) copy enclosed at pages 46 to 63 of case law PB -relevant at page 60 of case law PB, para 35.
Vaibhav Gems Ltd reported in (2017) 88 taxmann.com 12(Raj) - copy enclosed at pages 27 to 34 of case law PB - relevant at page 33, paras 9 to 11. This decision has been upheld by Apex Court in 259 Taxman 130(SC) -copy enclosed at pages 35-36 case law PB
We are in agreement with the contention of ld. AR, based on the proposition of law cited, that where there is no dispute that the money was advanced to AE as loan to a subsidiary which is under its management and control then there is no question of higher risk involved justifying adjustment. The ld. Tax authorities seems to have taken a prejudiced approach that subsidiary had poor credit rating so loan without security needed to be at arms length with higher credit rating, without appreciating that assessee’s credibility is also in backdrop of the subsidiary AE. Thus actually there is no higher risk to justify adjustment.
Then we find that with respect to the loan to Uniparts USA, it is admitted fact that this loan was granted in FY 2005-06. The interest charged on this loan at 8% p/a i.e. LIBOR plus 320 points was never questioned in the assessment proceedings in any of the earlier years. This is the first year where an adjustment has been made on this issue by the TPO. Then even in thesubsequent years, there is no addition on this issue though AO had show caused assessee but dropped the issue without any additions.
Similarly in respect to the loan to Uniparts Netherlands, it can be seen that this loan was granted in FY 2006-07. The interest charged on this loan at EURIBOR plus 200 points was never questioned in the assessment proceedings in any of the earlier years. This is the first year where an adjustment has been made on this issue by the TPO.
As for principle of consistency, though DRP’s observation that principle of res judicata is not applicable in assessments, yet what is material is that if lack of security was basis of adjustment in present year in variance to earlier years when loan was actually granted, then the factor of Risk involved does not change in subsequent years unless some evidence is further added, which not the case. Thus on principles of consistency too the assessee’s claim deserves to be sustained.
Thus we are of considered view that the impugned adjustment cannot be sustained. The ground no. 3 and appeal stand allowed.